World
Enter helicopter money: Global central bank's post QE era ammunition
Move over Brexit. The big talk in the financial markets right now is a meeting between former US Fed chairman Ben Bernanke and Japanese Prime Minister Shinzo Abe and his key economic advisors last week.
 
Bernanke, also dubbed 'Helicopter Ben' since the early 2000s after advocating tax cuts financed by money creation to fight deflation, is a leading academic voice on the rather exotic topic of helicopter money.
 
Even after pumping in trillions of yen into the financial system and delaying a scheduled sales tax hike to 2019, Japanese policymakers have had little or no effect in restoring growth and inflation. It is important to remember that in terms of the percentage of the monetary base, Japan has undertaken the largest quantitative easing (QE) programme -- much larger in relative terms than the US Federal Reserve and the European Central Bank (ECB).
 
It was actually the legendary Chicago economist Milton Friedman who introduced this concept in 1969 in his paper titled 'The Optimal Quantity of Money'. Friedman wrote: "Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated."
 
The basic thinking behind this economic idea is that if a central bank wants to raise inflation and output in an economy running significantly below potential, one effective tool is to simply give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank's target. (which is two per cent in Japan's case).
 
We are witnessing arguably the most unique conditions in the financial markets: stocks and bonds are both at all-time highs. Trillions of dollars of debt is negative-yielding but fixed income is still the best performing asset class. Some market participants are building long positions in gold as the global economic recovery is running out of steam and more action in terms of cheap money injection is expected from central banks. But rates can't go much lower than where they currently are and more QE is clearly not the answer -- looking at the economic data out of Europe and Japan.
 
Thus, we should expect the talk of helicopter money and its effect on asset markets to be one of the most hotly-debated topics in the financial world in the coming weeks and months.
 
What do we need to know about helicopter money? Initial introduction and thoughts:
 
Firstly, we need to understand that in theory, this is a fiscal policy financed by monetary policy -- an expansionary fiscal policy financed by the central bank's balance sheet. Unlike debt-financed fiscal programmes, a money-financed programme does not lead to increased future tax burdens. So, it requires the central bank and the government to work together and coordinate policy responses. This is not always easy as we saw when US debt ceiling stand-offs between Democrats and Republicans in Washington effectively pushed back against the efforts of the Federal Reserve to keep the country's economic recovery on track.
 
What also follows from the very construct of helicopter money is the scary fact that when governments become used to being able to fund tax breaks or investment projects with newly-printed money, they might decide that the tool is too useful to give up, even in good times. 
 
Secondly, how is this different from QE? And why can it be more helpful to the real economy? Economists argue that the major difference between QE as it has been carried out and helicopter drops as envisaged by Friedman is that the vast majority of purchases have been asset swaps, where a government bond is exchanged for bank reserves. While this has lowered government borrowing costs, its transmission to the real economy has been indirect and underwhelming. Direct transfers into people's accounts, or monetary-financed tax breaks or government spending would offer one way to increase the effectiveness of the policy by directly influencing aggregate demand rather than hoping for a trickle-down effect from financial markets.
 
Thirdly, as economist Willem Buiter points out, there are three conditions that must be met for helicopter money to boost aggregate demand. 1) There must be benefits from holding fiat base money other than its pecuniary rate of return. 2) Fiat base money is irredeemable: it is viewed as an asset by the holder but not as a liability by the issuer. This is necessary for helicopter money to work even in a permanent liquidity trap, with risk-free nominal interest rates at zero for all maturities. 3) The price of money is positive.
 
The idea of helicopter money and the framework which policymakers will likely deploy in the coming time may be slightly different from Friedman's idea depending on market conditions as well as the desired objectives. But one thing is certain. If QE fails, helicopter money will be dropped by major global central banks.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Can the bulls take Nifty, Sensex higher? Weekly Closing Report
We had mentioned in last week’s closing report that Nifty, Sensex were to move sideways to down. The major indices of the Indian stock markets have ended up over the week. The trends of the major indices in the course of the week’s trading are given in the table below:
 
 
Positive global cues and fresh buying support lifted the Indian equity markets on Monday as buying support was seen in interest sensitive stocks like automobiles and banks.  The BSE market breadth was skewed in favour of the bulls -- with 1,718 advances and 1,040 declines. Iron ore producer NMDC Ltd. on Monday said its production has grown by about 28% and sales have increased nearly 17% in the April-June quarter of the current fiscal. The shares of NMDC closed at Rs96.25, up 1.69% on the BSE. UK's decision to exit the European Union will not have any significant credit impact on India and other countries in the Asia Pacific region, Moody's Investors Service said on Monday. However, in case of countries where fiscal and monetary policy space is constrained, a shift in portfolio and/or banking flows in some Asia Pacific markets might hurt growth, said the credit rating agency.  While the fiscal and monetary policy space is constrained in India its exposure to external financing is limited, it said in its latest report.
 
Positive global cues, combined with short covering and healthy monsoon rains, buoyed the Indian equity markets to new intra-day highs in the last 11 months on Tuesday as buying was witnessed in banking, metal and consumer durables stocks. However, the BSE market breadth was tilted in favour of the bears -- with 1,519 declines and 1,243 advances. However, gains were capped due to profit booking at higher levels and uncertainties over upcoming macro-economic data like factory output -- Index of Industrial Production (IIP) -- for May and inflation figures for June. 
 
Coal India Board approved a buyback of over 10 crore shares at a price of Rs335 per share for an aggregate consideration not exceeding Rs3,650 crore, the company said on Tuesday. The buyback offer is, however, subject to approval from shareholders and other regulators and government authorities. But Coal India shares closed at Rs316.85, down 1.14% on the BSE.
 
Profit booking, coupled with disappointing macro-economic inflation data and lower crude oil prices, subdued the Indian equity markets on Wednesday. Consequently, the key indices closed the day's trade on a flat note, as selling pressure was witnessed in automobile, consumer durables and capital goods stocks. The NSE Nifty market breadth was skewed in favour of the bears -- with 17 advances and 34 declines.
 
On Wednesday, initially the benchmark indices opened on a higher note, in-sync with their Asian peers. However, equity markets soon ceded their initial gains as a weak rupee and disappointing inflation figures for June eroded investors' confidence. Nifty traded on a flat note. Banking and pharma sector stocks traded with mixed sentiments on profit booking.
 
Disappointing macro-economic data and mixed global cues subdued the equity markets on Thursday. Consequently, both the indices traded on a flat note. Buying was witnessed in banking, consumer durables and capital goods sectors, whereas stocks of information technology (IT) faced selling pressure. The BSE market breadth was tilted in favour of the bulls -- with 1,533 advances and 1,016 declines.
 
On Friday, key Indian equity markets were suppressed by a weak rupee and poor results from Infosys. Indian IT major Infosys on Friday reported double-digit net profit and revenue for April-June quarter, but lowered annual revenue guidance in dollar value, resulting in its stock plunging on the bourses. Though consolidated net profit grew 13.4% year-on-year to Rs3,436 crore and revenue 16.9% to Rs16,782 crore for the quarter under review, the IT company lowered dollar guidance for fiscal 2016-17 to 10%-11.5% from 11.8%-13.8% projected in April due to currency volatility and headwinds. The revised revenue outlook is based on June 30 exchange rate of Rs67.53 per dollar and 10.8%-12.3% on March 31 exchange rate of Rs66.26 per dollar. In constancy currency, consolidated revenue for the fiscal is expected to grow 10.5%-12% at June 30 dollar rate. The key indices closed the day's trade in the red, as selling pressure was witnessed in IT (information technology) and TECK (media, entertainment and technology) stocks. However, the losses in the major indices were less than 0.50% over Thursday’s close.

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SAT has a hard rap for SEBI's Whole Time Member, Asks another WTM to decide case
The Securities Appellate Tribunal (SAT) delivered a hard and embarrassing rap to a Whole Time Member (WTM) of the Securities and Exchange Board of India (SEBI) for its apathy and giving a run around to the appellant. SEBI has been also directed to pay Rs1 lakh as cost to the appellant. Although the SAT order does not mention the WTM's name, it is clear that the order was that of Rajeev Kumar Agarwal. He is one of the two WTMs at SEBI. "This appeal reveals the shoddy manner in which the directions of this Tribunal are dealt with by the WTM of SEBI," the Bench said says the order.
 
In its order on 15 July 2016, the SAT Bench of Justice JP Devadhar, Jog Singh and Dr CKG Nair said, “If for any administrative constraints it was not possible to pass an order within the stipulated time, then the WTM of SEBI ought to have sought extension of time, which the WTM of SEBI has failed to do. Instead, the WTM of SEBI resorted to a totally impermissible mode of representing that an order has been passed when in fact no order was passed by him. In such a case, informing the party that an order disposing of the representation is already passed, without actually passing an order, is nothing but an attempt to mislead in the matter. We strongly condemn the irresponsible approach adopted in the matter”. 
 
Kolkata-based Adventz Finance Pvt Ltd had filed a fresh appeal before the SAT, after being made to run around by SEBI and for not following directions from the Tribunal. 
 
Earlier on 6 May 2016, the SAT had asked SEBI to hear representations of Adventz Finance and dispose the matter within seven weeks or by 24 June 2016. On 21 June 2016, the WTM gave an opportunity to Adventz Finance to be heard, but did not pass any order, as directed by the SAT.
 
When the matter came up for hearing on 7 July 2016, the counsel for SEBI orally requested an extension of time to pass an order, which was rejected by the SAT. The Tribunal then asked the appeal to be placed for admission on 12 July 2016.
 
During the hearing on 12th July, the counsel for SEBI submitted a letter dated 8 July 2016 and told the Bench that "the said letter contains the reasons on the basis of which the competent authority viz the WTM of SEBI has rejected the representation of the appellant."
 
On perusal of the letter, SAT found that it was not an order passed by the WTM of SEBI but only a communication issued by the Chief General Manager (CGM) of SEBI recording the gist of the order allegedly passed by the WTM. To allow SEBI to submit copy of order passed by the WTM, SAT adjourned the matter and posted it after lunch on the same. When no copy of the order was submitted, the SAT adjourned the matter to 13 July 2016.
 
On 13th July, the counsel of SEBI told the SAT that there is no order passed by the WTM of SEBI. The counsel for SEBI submitted that the letter dated 8 July 2016 was issued by the CGM based on the endorsement made by the WTM of SEBI on the office note put up by a junior officer (AM) of SEBI on 23 June 2016. The SAT then adjourned the matter to 15th July.
 
During the hearing on 15th July, the counsel for the market regulator submitted an affidavit filed by the CGM of SEBI. In the affidavit, the CGM stated, "...the WTM had instructed that a note be prepared and accordingly, a note was prepared and put up for approval of WTM on 23 June 2016. Along with the said note, draft letters to be sent out to the appellant were also placed before the WTM of SEBI. The note, as also draft letters, was approved by the WTM on 27 June 2016 and, accordingly, letter dated 8 July 2016 was issued to the appellant, thereby communicating the decision of the WTM of SEBI disposing off the representation of the appellant."
 
When asked by the SAT, the counsel for SEBI admitted that there was no order passed by the WTM in this matter. The Bench said, "Thus, it is evident that the WTM of SEBI permitted the Chief General Manager to issue a letter to the appellant that the representation made by the appellant has already been disposed off by the WTM of SEBI, when in fact no order was passed by the WTM of SEBI. Since the WTM of SEBI has not passed any order, we would have directed the WTM of SEBI who had heard the appellant on 21 June 2016 to pass an order immediately.  However, we are informed that the said WTM of SEBI is travelling."
 
"In these circumstances, we quash the letter issued by the CGM on 8 July 2016 and direct SEBI to assign the matter to any other responsible WTM of SEBI who shall pass an order on the representation of the appellant within two weeks from today after giving an opportunity of hearing to the appellant. It would be open for such WTM of SEBI to hear the representation of the appellant as also the representation made by the Respondent No2 (Jai Annanya Investments Pvt Ltd) together and pass appropriate order," the SAT says.    
 
The Tribunal further said, "Since we are distressed with the manner in which the WTM of SEBI has discharged his quasi-judicial duties which is highly detrimental to the interests of the securities market, we direct the registry to forward a copy of this order to the Finance Minister and also to the Chairman of SEBI for information."
 
The order seems to suggest that SEBI's senior most officials are operating without understanding the responsibility and gravity of their role as regulatory body and a quasi-judicial authority.  It is surely a matter that needs the attention of the finance minister, the law ministry and the judiciary.
 

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COMMENTS

R Balakrishnan

10 months ago

When someone with power becomes an extortionist, justice is denied. Clearly SEBI being stuffed with people from ED or Tax or some other govt service is a recipe for unfairness and possible extortion. Apart from political motivation, personal graft also comes to the fore..

Samuel C S

10 months ago

SEBI is the most powerful regulatory agency in the country and the least accountable of all. The Chairman n Members are so audacious that they do not believe in rule of law. CBI, CVC and Finance Ministry are all hands in gloves with U K Sinha.

Vaibhav Dhoka

10 months ago

The affairs at SEBI are very shoddy.What action Finance ministry will take on such senior officers?SEBI has done more harm to market than any other authority.
JULY 12

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