Helicopter money: The best policy to address high public debt and deflation

[ksen]

http://www.voxeu.org/article/helicopter-money-today-s-best-policy-option

As provocatively discussed by Friedman (1969), helicopter money is a policy whereby new money is created by the central bank and provided directly to households and private businesses. Grenville (2013) notices that central banks have no mandate to give money away (they can only exchange one asset for another), and that such decisions need to be backed by the budget-approval process. In most countries, therefore, central banks cannot conduct helicopter money operations on their own – helicopter money must involve fiscal policymaking.1

Buiter (2014) focuses on the application of helicopter drops through overt monetary financing, whereby the central bank creates new money to finance a fiscal stimulus. He identifies the conditions under which such a helicopter drop increases aggregate demand. One of these conditions is the irreversibility of the new money base stock creation, which constitutes a permanent addition to the total net wealth of the economy, which is made possible by the (‘fiat’) money base being an asset for the holder but not a liability for the issuer (Buiter 2004).

Such irreversibility can be attained if overt monetary financing operations are executed by one of two routes.

•The first is by having the government issue interest bearing debt, which the central bank would buy and hold in perpetuity, rolling over into new government debt when the existing debt on its balance sheet reaches maturity.

In this case, the government would face a debt interest servicing cost, but the central bank would make an exactly matching profit from the difference between the interest rate it receives on its debt and the zero cost of its money liabilities, and would return this profit to the government.

•A second route is having the central bank buy government securities which are explicitly non-interest bearing and never redeemable.

In terms of the fundamentals of money creation and government finance, the choice between these two routes would make no difference (Turner 2013).

Note that the irreversibility condition has nothing to do with the fact that, at any future date, the central bank might decide to withdraw part or all of the liquidity injected in the system by selling its own bonds. In this case, the holders of liquidity would exchange it for the bonds sold by the central bank, but the total net worth of the economy would not change, only its composition would (shifting from more to less liquid assets). The addition to the economy’s net worth originally operated through the overt monetary financing would not be undone by any new open market operation.

Note that where overt money financing operations are run by the Treasury, without involving the central bank (see below), neither of the two routes above is necessary, since the Treasury directly finances the budget by issuing money or a money-like instrument.

With the Fed at the Zero Lower Bound this is basically the only policy option that could help jumpstart demand relatively quickly.

I have a question about this though:

•Finally, and most importantly, overt money financing involves no increase in public debt, whereas conventional bond financing does.

If overt financing doesn't create public debt why don't we do that for all of our federal spending?

 

[dismal]

http://en.wikipedia.org/wiki/Hyperinflation

 

[ksen]

nah

 

[thief of fire]

If overt financing doesn't create public debt why don't we do that for all of our federal spending?

How are you thinking the details would work though? What restrictions would be placed on what they could "print" money for?

 

[Loren Pechtel]

If overt financing doesn't create public debt why don't we do that for all of our federal spending?

How are you thinking the details would work though? What restrictions would be placed on what they could "print" money for?

Yeah, this sounds like a slippery slope to disaster.

 

[Horatio Parker]

What would all the bankers do?

BTW, there is much more private debt than public, and the private sector also creates more money.

From 1997 to 2007, lenders flooded the US economy with $14.4 trillion in net new private loans. Federal debt increased by a significantly smaller amount—$3.6 trillion—during that same period. An increase in bank loans represents the entry of additional money into the economy. For all the talk of the US government and the Federal Reserve Bank “printing money,” it is private lending that creates the most new money entering the economy.

 

[bilby]

How are you thinking the details would work though? What restrictions would be placed on what they could "print" money for?

Yeah, this sounds like a slippery slope to disaster.

Anything taken to extremes is disastrous. Does this imply we should do nothing?

Should interest rates be set to zero for all time, on the basis that raising them is a slippery slope to 300% interest rates?

If not, why shouldn't inflationary policies such as helicopter money be used to bring inflation up to the Fed target rate? There is no requirement for this policy to continue once the desired rate has been reached, any more than there is a requirement for interest rates to sky-rocket despite inflation being below the target rate.

It is crazy to say that there are levers that can never be pulled, simply because pulling them at the wrong time could be disastrous. Caution is needed; but outright prohibition is just silly.

Printing money and distributing it to the poor with no strings attached seems like a good idea in the current economic climate in the US. It is opposed on ideological grounds, but there don't seem to be any other reasons not to do it.

Indeed, the Australian federal government did something pretty similar to this back in 2008 when the GFC hit; and we are the only OECD nation not to have had a recession (our last recession was in 1990). At the time of this cash handout, public and business sentiment was plummeting, confidence was low, and the economy looked like it would stall completely. I can tell you from personal experience that the effect of the handout was rapid and positive - it was a one time lump sum, but it was enough for people who had needed a new refrigerator or stove or washing machine to go out and get one - and it gave both their confidence and the economy a huge boost.

 

[dismal]

Yeah, this sounds like a slippery slope to disaster.

Anything taken to extremes is disastrous. Does this imply we should do nothing?

Should interest rates be set to zero for all time, on the basis that raising them is a slippery slope to 300% interest rates?

If not, why shouldn't inflationary policies such as helicopter money be used to bring inflation up to the Fed target rate? There is no requirement for this policy to continue once the desired rate has been reached, any more than there is a requirement for interest rates to sky-rocket despite inflation being below the target rate.

It is crazy to say that there are levers that can never be pulled, simply because pulling them at the wrong time could be disastrous. Caution is needed; but outright prohibition is just silly.

Printing money and distributing it to the poor with no strings attached seems like a good idea in the current economic climate in the US. It is opposed on ideological grounds, but there don't seem to be any other reasons not to do it.

Indeed, the Australian federal government did something pretty similar to this back in 2008 when the GFC hit; and we are the only OECD nation not to have had a recession (our last recession was in 1990). At the time of this cash handout, public and business sentiment was plummeting, confidence was low, and the economy looked like it would stall completely. I can tell you from personal experience that the effect of the handout was rapid and positive - it was a one time lump sum, but it was enough for people who had needed a new refrigerator or stove or washing machine to go out and get one - and it gave both their confidence and the economy a huge boost.

You are aware they do attempt to print money moderately now, and have been for many decades?

 

[ksen]

You are aware that the OP is mostly about just printing money and giving it to people that will spend it in the economy to give it a quick shot in the arm?

 

[dismal]

You are aware that the OP is mostly about just printing money and giving it to people that will spend it in the economy to give it a quick shot in the arm?

Yeah. You are aware it really doesn't matter what the money is used for?

Print it, spend it, boom - inflation.

So easy even a complete economic imbecile like Mugabe or Chavez can do it.

Hint: when used by economists the term "helicopter drop" is mostly a mocking term.

 

[ksen]

So there's no middle ground between zero and Chavez?

 

[dismal]

So there's no middle ground between zero and Chavez?

You're soaking in it now.

But you asked the question: "why don't we just pay all our bills by printing money?" This is not the middle ground. This is the full Mugabe. You never go the full Mugabe.

Well, some people do. I linked them earlier.

 

[Underseer]

So why weren't all these conservatives and libertarians (who are of course completely different, honest) complaining when His Holiness saint Bush II gave money away to citizens? Why was that good, but this bad?

 

[ksen]

How does printing money to pay our bills significantly differ from borrowing money to pay our bills?

Aren't we told that excessive levels of debt will also lead to hyperinflation? Yet here we sit at still less than 2% inflation.

 

[jonatha]

How does printing money to pay our bills significantly differ from borrowing money to pay our bills?

Aren't we told that excessive levels of debt will also lead to hyperinflation? Yet here we sit at still less than 2% inflation.

That might suggest that our current level of debt is not in fact excessive.....

 

[dismal]

How does printing money to pay our bills significantly differ from borrowing money to pay our bills?

Aren't we told that excessive levels of debt will also lead to hyperinflation? Yet here we sit at still less than 2% inflation.

Borrowing money does not create money from nothingness. It is a transfer of existing money from Person A to Person B. Borrowing money in itself does not create inflation.

Borrowing a lot of money makes it difficult to pay money back later. If you are a government and have the ability to print money, when your massive otherwise unpayable debt comes due you tend to print money to pay it off. This is why hyperinflations are often preceded by unsustainable borrowing.

 

[coloradoatheist]

And as we found out with 2007, creating inflation for the sake of inflation is bad too. The Fed wants inflation, but it to be controlled. And to give money to the poor you have to give it in a way that business can know, plan and expand on it. A business won't hire just because it might make a one time extra $50.