Helicopter Drops are not Enough
By James Cumes
Two years ago, early in 2006, I wrote, in "America's Suicidal Statecraft", that -
"One of the more fascinating debates is whether, if and when we crash, we will have deflation or inflation – and either one in its most extreme form. Within this debate, we have such entertaining – or devastating – suggestions as the helicopter drop linked to the names of Friedman and Bernanke. Some forty years ago, one of the more beguiling habits of President Bokassa of the Central African Republic, was to fling handfuls of coins and paper money to his grateful people when he went on walkabouts among them. His little gesture drew the crowds, increased his popularity and nurtured his ambitions. Eventually, it helped to bring about his apotheosis as "Emperor Bokassa I of the Central African Empire". He was crowned in a magnificent, Napoleon-like ceremony, costing $20 million that the country could not, of course afford; but it added circuses to the presidential appeal. Sadly, however, the fantasy was short-lived. Even his exuberant generosity could not prevent the Emperor's eventual overthrow and imprisonment.
"Assuredly, there will be many extreme as well as some more rational proposals when what seems to be the inevitable crash does arrive. By that time, we may have reached what one commentator has called "The End of the Western World we have known since 1945", the United States dollar may have become a "monkey currency" like the Emperor Bokassa's and any dollar notes that Chairman Bernanke might drop from helicopters might have even less real value than the paper money with which the Emperor showered his people on his Coronation Day, back in 1977."
We can readily understand the political and social motivations for Bernanke and his associates now that the crash has come. Governments and central banks in the West seem largely to share those motivations.
Already, the size of the helicopter drop goes far beyond anything dreamed of in the past. Not just one helicopter but whole squadrons of jumbos have been unloading what, in the case of the United States alone, must now exceed one trillion dollars. One Harvard professor says that the American economy is so large that such a sum is not of great significance and he might still be unworried if the sum reached – as it probably will – two trillion or more. The European Union, the United Kingdom, Japan and others – even Russia in a sense – are conducting their own helicopter drops.
These will mainly help financial institutions. Unlike Bokassa flinging money to the presumed poor, Bernanke, Paulson and company are unloading their helicopters on the relatively rich – many of whom participated actively in creating the financial chaos.
At this stage, we cannot be precisely sure just what the longer-term motivation is for this splurging of "liquidity." A natural impulse has been to stop panic and avoid such a precipitate collapse of the financial "system" that the whole world market economy would grind to a shuddering halt. That would hurt everybody; so everybody can be said to benefit, at least indirectly, from the helicopter drops.
Again, in 2006, I wrote –
"There have been references by the new Fed Chairman – not entirely in jest - to the device of a helicopter drop to spread purchasing power to the masses, if that might become necessary to avoid a debilitating depression and deflation. Whether through the helicopter or otherwise, the option of printing more and more money to relieve the burden of debt and to keep the economy running at anything like acceptable levels, must have its attractions.
"However, any such approach must bear in mind what happened during and after the German hyperinflation of 1923. Effectively, the economy collapsed into barter, much of the established society was destroyed and a new currency had to be installed. The collapse of the economy and the ruin of the society were seen by some to be factors in the rise to power of the extremist Nazi regime. While we cannot forecast that this would happen in the United States and while, further, we cannot paint a precise picture of the details that the process would entail, an attempt to extract the United States from its indebtedness through the unrestrained printing of money would certainly bring dramatic changes to the political, social, economic and strategic situation of the United States. The pattern of world power that might emerge is difficult to forecast in any detail or with any confidence. At the very least, it might hasten the advent of a period of acute instability as the United States was seen to lose its status as a superpower and a period of transition to some sort of new world leadership to ensue."
What we must try to be clear about is whether we have sufficiently sound prospects to justify our undertaking these kinds of "helicopter drops" in the light of the catastrophes they might themselves precipitate.
First, we must acknowledge that the financial "system" which has prevailed for at least the last decade and, in some ways, for the last thirty or forty years, is dead. Any attempt to keep it on life support will only drag out and intensify the agony and risks to world security – strategic as well as economic.
The death of this financial "system" was inherent in its nature. It was a casino-type, speculative system which could live only in the short term. It always threatened catastrophe for the real economy. Ponzi elements were so entwined in it that as soon as people began to lose confidence in it the whole structure had necessarily to fall down.
The "system" has been based on a "licence to self-destruct" version of a "free market" and the accumulation of levels of individual, household, corporation and public debt, especially in the United States, that are so unprecedented that, in any earlier age, they would have been unimaginable. The emphasis has been on runaway consumption rather than production, on uninhibited global borrowing to achieve it and massive "leverage" by often Ponzi-like financial institutions to finance it.
The only question has always been not if but when the inherently unstable structure would collapse.
Inevitably we now face a period of widespread instability and distress. Potentially, that period is likely to be as long as or longer than that of the Great Depression of the 'thirties and the distress even more bitter and global. The threats to human survival, in the age of nuclear and other weapons of mass destruction, are much greater than ever before.
In large measure, we must resort to "helicopter drops." For political and social, as well as economic reasons, they are unavoidable. However, even while we are making these drops of utter desperation, we should keep our focus on whom the drops should help in the short term and on what must be our longer-term goals.
Above all, those goals must include a return to sound economic and financial policies, that is, policies which recognise again with absolute clarity that genuine prosperity in terms of income and wealth depends on real public and private, mostly fixed-capital investment, the development of ever higher productivity and real production which takes account of the real needs – food, clothing, shelter, health, education, etc – of all our people and which does so in sustainable ways.
Inevitably, a return to sanity like this is going to take time. So the helicopter drops will need to focus to a substantial extent on meeting emergencies – to rescuing those whom the financial hurricane has left, so to speak, without shelter and to finding some means of employing them in useful tasks as soon as we possibly can - in weeks rather than months and months rather than years. Even if it is only getting them to dig holes and fill them in again, that could be more productive than giving life support to financial institutions which don't deserve it and which are, in effect, already dead in any meaningful sense anyway.
Let us be crystal clear that we surely would not dream of reviving the "financial services industry" with which we have burdened ourselves in recent years and which is now self-destructing. Urgently and most imperatively, we must create something sane and satisfying to put in its place.
In proceeding to these reconstructive tasks, we need to reflect on the economic and political system and what we must have it deliver. A capitalist system has virtues but it must be managed with care, discipline and a deep and abiding sense of responsibility. A democratic system has virtues too but it is vulnerable to charlatans and self-seekers. A system of world security such as the United Nations also has virtues but it must do what its charter intended and not drift into inanities which only fecklessly bolster the institutions themselves rather than attend to the goals of their founders. The United Nations has totally failed in its responsibilities under the economic and social provisions of the United Nations Charter. A whole array of other international economic and financial institutions, including the World Bank and the IMF, have similarly failed miserably. They have all been utterly useless in preventing or even slowing our feverish race to catastrophe.
The longer-term goal of a secure and stable world we must always keep in mind; but we still have an emergency situation right now with which we have to deal.
Fundamental changes not only in the global economic and financial situation but also in the global strategic and security situation are vital. As a single superpower, the United States is already well along the road to self-destruction. Those – mainly Americans – who brought about financial and economic disaster for the United States also undermined its single superpower status. The United States – and its closest allies - need to face up to this and to the very real prospect that the dominance the United States had after the Second World War will never return.
At the same time, the Administration in Washington needs not only to acknowledge America's changed status but also to draw on the enormous resilience and resourcefulness of the American people to help them – and us - to achieve a lasting global recovery. Other countries must be drawn into this effort. We hope the European Union can hold together. To the extent that it can and can give impetus to a new and more realistic "globalisation" that will be of enormous value. We must hope too that Asia, Latin America and Africa will have a more influential role than in the past – both in devising effective economic and financial arrangements and in ensuring global security. The BRIC countries – to whom so much power has recently been passing – would seem likely to be less subordinate and more equal partners in the quest for prosperity and security than they were in the past.
This is not to underestimate the magnitude of the emergency and the task of rehabilitation that confronts us. Rather is it to emphasise the longer-term and more fundamental objectives of relief and rehabilitation we now have. We need "helicopter drops;" but they must be of kinds that do not merely attempt to raise the undeserving dead. Instead, they must bring succour to the living; but, even so, helicopter drops, in the short or the long term, will be not nearly enough.
In that context, the present Administration in Washington and the one which will take office in January 2009 might reflect on what happened to Emperor Bokassa and the Central African Empire. The masses rejoiced for a moment as Bokassa showered them with fancied riches; but the "feel good" factor didn't last. The Central African Empire soon dissolved; and Bokassa himself quickly became only a vaguely remembered, trivial footnote in human history.
He is no longer with us but, if he were, he would no doubt agree that helicopter drops have their overnight virtues but also their severe limitations in the many tomorrows yet to come.
© James Cumes