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Janus Capital’s Bill Gross Peeks into the Future and Sees Money Falling from the Sky

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Bill Gross took a peek into the future in his most recent Monthly Investment Outlook for Janus Capital, and he saw money raining from the sky.

Gross said he believes the structural changes currently occurring in the US economy will ultimately lead to so-called helicopter money.

gross

Of course, choppers wouldn’t literally drop cash from the sky. But helicopter money is the ultimate stimulus program. The newly printed cash goes directly into the hands of the people themselves. Basically, the government hands out money – or figuratively drops it from a helicopter. A recent Guardian article explained the policy this way:

As the Deutsche research makes clear, the most basic variant of helicopter money involves a central bank creating money so that it can be handed to the finance ministry to spend on tax cuts or higher public spending. There are two differences with QE. The cash goes directly to firms and individuals rather than being channeled through banks, and there is no intention of the central bank ever getting it back.”

Basically helicopter money is stimulus that isn’t paid for with private borrowing or taxes. It’s “free money.” Kind of.

So, why would policymakers ever do such a thing? Well, when you’ve driven interest rates below zero and exhausted round after round of traditional QE, what options are left?

Gross takes his analysis to an even deeper and somewhat philosophical level. He sees structural changes coming in the economy driven by advances in technology and a shift in generational thinking:

Most humans who walked this Earth were alive inside a culture that was constant for centuries, yet now it seemed that technology was mutating standards like a cytoplast or perhaps at worst – a cancer cell. Who could say whether this new life form was positive or negative? Who could say that an older generation was any less an ideal than the succeeding one? My experience of the divide between Boomers and Xers is like that; I recognize that youth will be served, but not always for the better…Change propels economies as well as cultures, and sometimes before we are even aware of it. We listen to Trump and Bernie, then Cruz and Hillary as if one of them might be the mythical Wizard of Oz, guiding us down that yellow brick road to reinvigorate growth. They all try to emulate the Wizard of course. ‘Change you can believe in’ was Obama’s mantra and then there was Clinton’s ‘I come from a city called Hope’ and so on. Eisenhower was probably the last honest politician. ‘I like Ike’ was his promise for the future, and I think many voters actually did – like Ike. But back then and certainly now, it was the economy that was changing, not politicians’ promises for a better future, and government policies usually took years to respond.”

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So, what is this fundamental change? As Gross sees it, it’s the rapid advance of automation and the impact it will have on employment:

But here’s the thing. No one in 2016 is really addressing the future as we are likely to experience it, and while that future has significant structural headwinds influenced by too much debt and an aging demographic, another heavy gust merits little attention on the political stump. I speak in this Outlook to information technology and the robotization of our future global economy. Virtually every industry in existence is likely to become less labor-intensive in future years as new technology is assimilated into existing business models.”

Gross believes this structural shift will lead to policies such as a Universal Basic Income paid out by the government. But how do you pay for such a thing? Well, government can raise taxes. But Americans have shown little tolerance for high tax rates. So, helicopter money becomes a politically viable option. As Gross said, with no private borrowing or taxes involved, Democrats and Republicans alike can get on board.

Of course, we can all see that this is merely a sophisticated game of kick the can down the road. But Gross astutely observes that political expediency will more likely than not rule the day:

Money for free! Well not exactly. The Piper that has to be paid will likely be paid for in the form of higher inflation, but that of course is what the central banks claim they want. What they don’t want is to be messed with and to become a government agency by proxy, but that may just be the price they will pay for a civilized society that is quickly becoming less civilized due to robotization. There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die.”

Ultimately, the whole thing will probably collapse. We’re not talking about a sustainable policy here. But politicians and central bankers will keep it limping along as long as they can – even if they have to drop money from helicopters. Gross said investors need to prepare for this new reality:

I have long argued that this is a Ponzi scheme and it is, yet we are approaching a point of no return with negative interest rates and QE purchases of corporate bonds and stock. Still, I believe that for now central banks will print more helicopter money via QE (perhaps even the US in a year or so) and reluctantly accept their increasingly dependent role in fiscal policy. That would allow governments to focus on infrastructure, health care, and introduce Universal Basic Income for displaced workers amongst other increasing needs…Investment implications: Prepare for renewed QE from the Fed. Interest rates will stay low for longer, asset prices will continue to be artificially high. At some point, monetary policy will create inflation and markets will be at risk. Not yet, but be careful in the interim. Be content with low single digit returns.”

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