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Quote: Bill Gross Now Wants ‘Helicopter Money’ Posted on May 4, 2016 by Brad Hoppmann Bill Gross is famous for being perhaps the best bond fund manager ever. His longtime gig at fixed-income powerhouse PIMCO, and now his new position at Janus, has proven that when it comes to bond investing, Gross is one of the best around. Gross also is well-known for his homespun, and often literary and culturally referenced, "Investment Outlook" letter to clients. I admit to being both amused and educated many times after reading Gross’ thoughts, and this month is no exception. In his May outlook, published today, Gross has raised more than a few eyebrows with his call for greater government stimulus via what’s known as "helicopter money." That’s right — the "Bond King" says that the Federal Reserve should team up with the U.S. Treasury and engage in another round of quantitative easing (QE) that would print trillions of dollars to buy government bonds. Gross jokingly refers to this as "helicopter money," a term first used by economist Milton Friedman in 1969. That’s when he said dropping money out of helicopters for citizens to pick up would be one way of restarting the economy and fighting the negative effects of deflation. Gross wrote this in response to what he sees as a threat of technology and "robotization" displacing millions of people and reducing the need for a bigger workforce. He argues for the fiscal stimulus in the following manner: Drop the money from helicopters. Now, even though this idea sounds more fictional than Trump’s 15 foot wall, it really isn’t. Milton Friedman, then Ben Bernanke and now a host of respected economists including the conservative Economist magazine itself are introducing the idea. These advocates do not really intend to throw money out of choppers. In broader terms, they are advocating fiscal stimulus but stimulus that isn’t paid for with private borrowing or taxes. That last sentence is critical — "not with private borrowing or taxes". Democrats and Republicans alike can endorse that. Gross goes on to explain that he thinks the need for more money to be distributed throughout society by a private bank/government agreement now is a necessary action. Per his Investment Outlook: Instead, the money can be printed by central banks as it has been recently. It’s a hard concept to understand and that’s why politicians never discuss it — nor do most central bankers, who want to preserve the sanctity of their "balance sheets" and independence of their institutions. But the independence between central banks and government is rapidly eroding — a new culture is forming if only by necessity. Printing money via QE is in effect a comingling of monetary and fiscal policy, of central bank and treasury. Now if this sounds like a giant money-for-free scheme — well, you’re right. Even Gross acknowledges as much. Yet here’s his retort to this objection: 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. Such is the mess we are in, when even a very smart mind like Bill Gross thinks that the Fed should … Drop the pretense of someday selling the Treasury bonds on their balance sheet back into the open market, and Just do what they are de facto doing anyway — throwing money out of the helicopter and into a cash-starved, robot displaced crowd. Finally, Gross earns his money by writing that the investment implications of such a plan are such that: 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. Sounds to me like it’s a good time to buy that house or refinance your mortgage again! It also sounds like, if you’re an income investor, you’ll need to continue being more aggressive and more selective with your high-yield portfolio.