Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 22 February 2015

Helicopter money and the government of central bank nightmares

If Quantitative Easing (QE), why not helicopter money? We know helicopter money is much more effective at stimulating demand. Helicopter money is a form of what economists call money financed fiscal stimulus (MFFS). In their current formulation independent central banks (ICB) rule out MFFS, because the institution that can do the stimulus (the government) is not allowed to cooperate on this with the institution that creates money (the ICB). In a world where governments - through ignorance or design - obsess about deficits when they should not, it turns out that MFFS or helicopter money is all we have left to prevent large negative demand shocks leading to deep and prolonged recessions. So why is it taboo? 

One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers. QE gives them that asset, but helicopter money does not. The nightmare (as ever with ICBs) is not the current position of deficient demand, but a potential future of excess inflation that they are unable to control.

Here it is perhaps easiest to talk about monetary policy as putting money into the system when inflation is too low or taking it out when inflation is too high. QE creates money when interest rates are at their Zero Lower Bound (ZLB), but that money can be taken out of the system later if need be by selling the assets that QE buys. Helicopter money also puts money into the system at the ZLB, in a much more effective way than QE, but it cannot be put into reverse by central banks alone. The central bank cannot demand we pay helicopter money back. [4] 

If the government cooperates, this is no problem. The government just ‘recapitalises’ the central bank, by either raising taxes or selling more of its own debt. Economists call this ‘fiscal backing’ for the central bank. In either case, the government is taking money out of the system on the central bank’s behalf. So the nightmare that makes helicopter money taboo is that the government refuses to do this. [1]

What kind of government would this be? Inflation is rising, and the institution tasked with bringing it back under control makes a request that can be satisfied fairly painlessly by the government issuing some more debt. A government that refuses to do this is saying very publicly that it no longer cares about high inflation: it prefers an environment of low interest rates and high inflation and it is prepared to cripple its central bank to achieve this.

Now imagine a government with these preferences, and now put it in a world where the ICB does not need recapitalising and is selling assets and raising interest rates to do its job. Are we really meant to believe that such a government would ignore its preferences and let the central bank get on with it? Of course it would not - it would take away the central bank’s independence by forcing it to stop raising interest rates.

In other words, a government that would refuse to recapitalise an ICB is also a government that would have no hesitation in ending central bank independence. Holding assets is no protection for an ICB against this government of its nightmares. [2] 

The reason we have independent central banks is not to stop us becoming like Zimbabwe. It is to stop governments taking small risks with inflation for short term political gain. Like the occasion I was told that the Chancellor (at the time) knew full well that interest rates needed to rise now to reduce inflation, but there was no way that would happen until after the party conference. But this kind of government is not the kind that would deliberately sabotage its own central bank by refusing a request for recapitalisation.

Tony Yates writes of helicopter money: “Once government gets a taste for it, how could it resist not helping itself to more?” This is a statement about a government of nightmares that goes on a spending spree using money created by the central bank, and not about real governments in advanced economies. The idea that a perfectly sober government becomes a drunkard the moment it sees its central bank undertaking helicopter money is absurd. If ever we are unlucky enough to have a government that is a drunkard, an ICB with some assets to sell will not be enough to stop it raising inflation.

So this nightmare that makes helicopter money taboo is as unrealistic as most nightmares. The really strange thing is that ICBs have already had to confront this nightmare. It is more than possible that when central banks sell back their QE assets, they will make a loss, and so will be faced with exactly the same problem as with helicopter money. [3] A central banker knows better than not to worry about something because it might not happen. So the nightmare has already been faced down. It therefore seems doubly strange that the taboo about helicopter money remains.

[1] It is sometimes suggested that if the central bank runs out of assets, it can create its own, by issuing central bank debt. This would be effective if the nightmare government was unlikely to last, and a new government would later emerge that would recapitalise the bank. However it seems problematic as a solution for a permanently uncooperative government where inflation is too high, because the only way the central bank can pay the interest of the assets it issues is by creating more money. Corsetti and Dedola treat reserves as an alternative to debt issued by governments, but here the idea seems to be to rule out default as an option.

[2] An independent judiciary could protect an ICB. However it would be equally possible to write into law the duty of a government to ensure an ICB can do its job.


[3] The Bank of England obtained an almost complete indemnity from the government for QE losses, but other central banks have not (see Willem Buiter here).

[4] The central bank could just loan the helicopter money. But in practice this amounts to the same thing: a government that will not back its central bank will tell people not to repay the loan.  

62 comments:

  1. This comment has been removed by the author.

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  2. Very clear post. There are, I believe, a number of central banks that already issue debt (for example, Korea & Brazil). But isn't the more pressing issue what happens to the net income of the CB when they start to raise rates? The present value of a CBs net income is a closer approximation to its "equity" value. If CBs raise the IOR and net income becomes negative, how will they pay this? This occurs independently of the value of their mark-to-market net assets: they can have negative IOR with positive or negative accounting equity.

    There are circumstances, I suspect, where the only option is to raise reserve requirements and pay zero on required reserves. This is effectively the CBs equivalent of taxation.

    Perhaps most intriguingly, market interest rates appear to be adjusting significantly without any change in official interest rates. We may be in an equilibrium where official rates stay close to zero and have no need to move.

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  3. What is helicopter money?
    Is it CB liabilities issued for non-financial assets. Historically it was supervising this kind of state behaviour that gave us parliament. If instead CB swaps liabilities (reversible or not) for non govt financial assets, well, it already operates on liquidity schedules in this way. In so far as this behaviour affects its profitability, that has fiscal effect in that a change in remittances to the treasury will show up on the consolidated fund (the deficit).
    So what is helicopter money?

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    1. Hugo, helicopter money is fiscal stimulus, it can only be performed by the currency issuer. In the UK case, the government's Treasury. Only the Treasury can inject (spend) "financial assets" into the economy or remove them by taxation. The Central Bank cant do either of those actions but, it can swap one financial asset for another using "reserves". It can use its power to swap financial assets to control interest rates. Operationally in a FIAT currency economy the Government's Treasury and its wholly owned Central Bank, are one and the same and work in tandem.

      This will not make any sense until you understand the difference between government (vertical) money and commercial bank (horizontal money). Try this first http://e1.newcastle.edu.au/coffee/education/education_view.cfm?ID=2

      Then read http://heteconomist.com/verticalhorizontal-vs-exogenousendogenous/

      It may help if you consider that when the Treasury spends new money (out of thin air) into the economy, it effectively spends twice. If it uses its keyboard to put winter fuel payments into peoples bank accounts, it puts the same amount into the "reserve" accounts, of their banks at the Bank of England. This so the commercial bank's balance sheet continues to balance. It has an asset to match the liability the Treasury gave it by putting money in its clients' accounts.

      The government will eventually get all its spending of "vertical" money back via taxation. It will take the money out of the bank's clients' accounts as a tax payment. At the same time it will take back the equivalent "reserve" amount from the commercial banks reserve account at the BoE and together the two parts will disappear back into thin air from whence they came.

      Keep in mind that all the government's annual budget deficits; in aggregate, the national debt, is all its vertical money spending it hasn't got back yet from the private sector, because they are saving it. The governments national debt is the non-government sectors total national savings; pound for pound. (Acorn)

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  4. The central bank could perform heli's without worrying about fiscal cooperation by issuing emoney. The CB also has no budget constraint so it could more effectively stimulate spending independantly of the treasury.

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  5. Which accounts at the CB get credited?

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    1. Hugo, ignore CMA and about 99% of comments on this site, they are talking nonsense. The ignorance of basic fiat currency "accounting" rules on this site, renders any, so called, "economics" pontificating, total fiction. Accounting is fact based on statutes and law courts; economics has no such foundation.

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  6. Central banks pay out dividends according to accounting profits, which is "helicopter money" if the government spends it, which they almost always do. So there actually isn't a taboo against helicopter money. There's only a taboo against negative capital. If QE or other speculative operations cause a CB to lose money, the CB will stop paying dividends until the balance sheet is repaired.

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    1. Helicopter money goes straight to the people, not to the government.

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  7. At page 6 the authors of this paper https://www.interdependence.org/wp-content/uploads/2012/03/Paul-McCulley-Fellows-Paper.pdf
    tell us that the fed tried to persuade the US treasury to undertake principle reduction of Fannie / Mac govt guaranteed mortgages. As the fed holds lots of mortgage backed securities it would take the hit on its balance sheet. The reduction in dividend payment to treasury is the helicopter money.

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    1. Helicopter money goes straight to the people, not to the government.

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    2. Sure, that's the point right. But how? How does it go to the people without collapsing the political-economic distinction between democratic fiscal action, and technocratic monetary action. I am hazarding the view that we already square this circle through the level of central bank profit transfer to treasury. I'm saying that from a consolidated govt sector perspective helicopter money = negative central bank profits. The political taboo is then manifested as treasury being forced to recapitalise the CB. Can CB officials risk doing that for their careers if their pals in treasury don't want them to.

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    3. It's both fiscal and monetary policy as Wren-Lewis writes. "In their current formulation independent central banks (ICB) rule out MFFS, because the institution that can do the stimulus (the government) is not allowed to cooperate on this with the institution that creates money (the ICB)."

      "Helicopter money is a form of what economists call money financed fiscal stimulus (MFFS)."

      It's a "form" in that the ICB is printing money and giving it to the people.

      "One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers. QE gives them that asset, but helicopter money does not. "

      So as you ask, how do they account for what happened since no assets are purchased? But with assets do they have to sell them or can they keep them on the books forever? Could they put an asterisk on their balance sheet and say "on such a such day we did a helicopter drop"?

      As you say the profits the ICB receives come out of nowhere and are given to the government. (Why doesn't it hold on to those profits to make its balance sheet "appear" better?) I guess with a helicopter drop they could give the money to the government who would then immediately pass it on in a combo fiscal-monetary move that wouldn't alter the ICB or the government's balance sheets.

      It would effect the economy however by giving it more demand and inflation. This would only be a bad thing if the output gap was closed and it created excessive inflation disturbing price stability. Creditors with debt contracts don't want too much inflation as it reduces the value of those contracts.

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  8. This also shows why QE can have a negative helicopter effect. Mark clips his coupons and sends them to George who pays Mark who then pays George. George gets a smaller deficit and those who had saved and now have a marginal propensity to consume (pensioners) don't get a helicopter ride.

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  9. In the U.S. we haven't had inflation for 40 years. Back then unions were strong enough to negotiate price hikes into their contracts. No longer.

    Japan is struggling to create inflation. Europe is sinking into deflation. Volcker showed us how to fight inflation. In my mind he overdid it and cause too much collateral damage.

    To worry about inflation now is bizarre and probably a result of ideological thinking.

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  10. The increased monetary base after helicopter money should only have a level effect on the price level, not a permanent impact on the slope. It's been wasteful not having done it at some point in the past 6 years out of fear for a one-time effect.

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  11. Would it be possible to get both politicians and central bankers out of AD-management by having some sort of per-defined deficit management policy ?

    For example at the simplest level you might have a sales tax/subsidy that is adjusted frequently to keep an NGDP target on track and whose sole purpose is to fine tune the deficit via money creation and destruction. At a more sophisticated level you might use OMO plus tax changes to the same effect (for example: to avoid disruptive frequent tax changes).

    The algorithm for this could be easily programmed , and run on a computer that received direct feeds on the latest NGDP data.

    Of course politicians could have the computer reprogrammed, or switched off at any time. But if this system could be shown to work and became popular with voters the political process might make it hard for that to happen.

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  12. Helicopter money is institutionally forbidden of course.

    The whole point of having a separate central bank balance sheet with its own capital position is so that the government can exert some discipline over the deficit generating capacity of central bank monetary policy.

    So the idea of the bank or the government being in a difficult position with the prospect of unwinding a hypothetical CB helicopter drop is a non-starter.

    A helicopter drop is a fiscal operation in its principal activity, unlike the secondary fiscal effects of permissible central bank activity (including QE).

    The government doesn't want to hand over that kind of fiscal operation authority. If the central bank seeks authority to make at helicopter drop, it can do so from the outset and with constructive co-ordination using a simple agreed upon exchange of government debt for treasury deposit balances. That avoids any dysfunction at the capital level. Treasury can then distribute the balances according to plan.

    Better to propose this through the front door than come in through the basement window and set the CB capital position offside in an unnecessary way.

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  13. I am unaware of any central bank that has the legal authority to hand out money to citizens. Maybe there are some clauses in the laws defining the framework of the Bank of England that would allow this, but I doubt that this holds for other central banks. And without such an authority, central banks cannot engage in helicopter money by definition.

    And the fiscal authority cannot assume that any expenditure will remain "money financed" forever. The central bank may need to sell bonds out of existing holdings in order to hit its interest rate target. This is functionally equivalent to new debt issuance from the perspective of government finances, as the fiscal agency loses seignorage "revenue" from the previously "monetised" debt.

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    1. This is the point I was seeking to get someone to say. The CB cannot legally just credit accounts on its balance sheet without taking an asset back over the counter. So it can't do an overt monetary finance without the help of the fiscal authority, which must kick the move off by issuing the bond. However, what I wanted to explore was how far could the CB coerce the fiscal authority to issue the bonds by acting in such a way as to incur capital loses (buying rubbish debt in the market), eliminate its profit, dry up the remittance to treasury and do encourage a larger deficit, and ultimately put itself in need of recapitalisation, I.e. It gets that govt debt it needs to do the overt money financing.

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    2. It's the government that pays the helis. It's like the winter fuel payments made in the UK to everyone over 60, but to a wider constituency.

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    3. Hugo, see my previous. The fiscal authority (Treasury in UK) kicks the move off by spending its (vertical) money to buy some goods or services from the private sector. It has increased the "financial assets" in the economy. That money will have been credited to some firms bank account at a high street bank. At the same time, it will have credited the high street banks "reserve" account at the BoE. The high street bank's balance sheet balances. A liability to a client is balanced by an asset from the Treasury. In the horizontal money world of high street banks, everything sums to zero. Liabilities are always balanced by assets. For every loan the bank makes, a deposit is created. The deposit is a liability for the bank, the loan agreement with the borrower is the banks asset. Like all deposits in the high street bank, the horizontal money created "out of thin air" by the high street bank, via the loan process, will require a "reserve" amount at the BoE, if it has to move anywhere.

      The firm that sold the goods to the government, goes down to its bank's ATM and takes half the deposit, from the sale, out as cash notes. This moves the money out of the horizontal money world, back into the government's vertical money world. The firms account deposit, is reduced by half and hence the "reserve" requirement at the BoE is reduced by half. The other half of the reserve has been converted into the other form of base money "cash". Cash plus reserves together are the base money. The Treasury and the BoE would prefer base money (initial government spending) to remain 100% in reserves. Printing and distributing a cash substitute is a pain.

      Say the firm now wants to pay another firm's invoice with the remaining half of the deposit created by the sale. It pays the money into the other firms account by internet banking at another bank. The sending and receiving high street banks now, both, have unbalanced balance sheets. At the end of the banking day BoE "interbank settlement" will shift the "reserves" from the sending bank to the receiving bank. Both banks now have balanced balance sheets again. If the sending banks didn't have enough "reserves" to settle, it would have borrowed them, at interest, from another bank in the "interbank" market or the BoE at a penalty rate.

      The Treasury doesn't "borrow" money from anybody in its own currency. All Gilts are bought with "reserves", that is money that was spent previously by the Treasury. Think of interest paying guilts as welfare payments for rich people. The Treasury does not have to issue Gilts. It could leave all its spending as "reserves" at the BoE. Buying a Gilt just moves money from a BoE reserves account to a BoE securities account. No new money (financial assets) are created in the process (except interest payments, by the treasury, to the holders). Like wise QE does the reverse. Money is moved from the securities account at the BoE, back to the reserves account at the BoE. No new money is created or destroyed in the process.

      Have a read of Helicopter Ben's original speech, then think Eurozone deflation.
      http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm

      Hope that helps Acorn.

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  14. Just issue monetary base. End the voluntary rules that require borrowing.

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    1. Agreed. That’s what Positive Money and Richard Werner advocated in their joint submission to Vickers. The only possible problem there is that the policy might be difficult to reverse. However that strikes me as a small problem. First, the fact that government has not borrowed, i.e. issued debt, does not stop the central bank raising interest rates by wading into the market and borrowing, though the law might have to be changed to permit that. Second, fiscal stimulus was adjusted in the UK at the flick of a switch during the crisis by adjusting VAT (down and then up again).

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  15. On reflection, if the monetary and fiscal authorities have the same objectives, there is really no difference between QE and "helicopter money" - defined as money-financed government stimulus. What's the substantive difference between the government borrowing directly from the BoE to finance spending (a helicopter drop) and issuing government bonds, which the BoE buys, to finance the same spending?

    Consider a helicopter drop where the government decides to increase spending and finances this by borrowing directly from the BoE. Commercial bank reserves rise by an amount equal to the increased government spending. Now what's the difference between this and QE? The only difference is that the BoE does not have a government bond on its balance sheet. But even this is not necessarily true. It entirely depends on the accounting treatment the BoE uses for the "loan" it has made to the government. It could easily decide that when it "money-finances government stimulus" the "loan" it is making to the government is an asset on its balance sheet. Unsurprisingly, the accounting treatment of QE is equivalently arbitrary. The income the BoE receives on its gilt holdings is remitted to the Treasury - so to all intents and purposes, when the BoE buys a government bond the consolidated debt of the government declines (ignoring the treatment of bank reserves at the BoE). It would be entirely reasonable for the accountants to treat QE as the cancellation of government debt, and the reversal of QE as the issuance of new debt. In which case there really would be no difference between QE and "helicopter drops" as defined.

    Frankly, these distinctions relate to semantics and accounting treatment. They are not substantive issues. The real point is that it is illogical to tighten fiscal policy when a CB is engaging in QE, because QE is the monetisation of debt.

    QE for the people (a helicopter drop as Friedman defined it, and which involves no fiscal authority) is substantively different (although not in accounting terms if the cash created is treated as an infinite duration loan). More importantly, it provides a transmission mechanism for monetary policy which does not rely on bank lending or asset prices. The distinction between monetary and fiscal policy can be defined either institutionally (it's "monetary" if the CB does it), or by the creation of base money or not (it's monetary policy if it involves base money). As for monetising deficits, there is no taboo - it's already been done, even if the accountants are in denial!

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    1. I agree. This was where I started on this issue with various posts which said HM was 'just' fiscal stimulus plus QE. Ideally we would persuade governments to undertake the fiscal stimulus and stop obsessing about deficits (despite QE). But they seem incapable of doing so, so instead helicopter money becomes a means of allowing the central bank to initiate a fiscal stimulus that appears not to stop the governments deficit reduction plans. In a way its all rather institutionally semantic, but the problem is real nevertheless.

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    2. A "helicopter drop" is a marginal deficit.

      Institutional monkeying around won't change that fact.

      Deficit phobes would pounce on that more than ever.

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    3. I think the reason 'helicopter money' has never advanced beyond a thought experiment is found in the words "for the people". Giving money to banks is fine because banks are run by 'people like us' who won't rock the boat (probably not true by the way) but giving money 'to the people' smacks of redistribution and socialism. So even if it can be proved to be the most effective way of kick-starting the economy it simply won't happen.

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  16. I don't see why a helicopter drop should lead to spiraling inflation for mechanical reasons (as opposed to psychological reasons, which might be plausible), yes the money stays in the system permanently, but the 'hot-potato effect' should have a finite duration and it's extremely unlikely that something like this could cause uncontrollable inflation several years after the the money was 'helicopter dropped' in, if the economy is in a recession and far below its potential.

    But even if inflation does start to rise, central banks and fiscal authorities should face no difficulty removing money from the system again, even if it isn't the same money, just by doing what they usually do: raising interest rates, lowering the deficit, or if necessary things like stricter central bank regulations on credit expansion.

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  17. "We know helicopter money is much more effective at stimulating demand."

    The American colonies issued new paper money either by spending it directly, or by lending it to colonists. Most observers at the time said that lending was more stimulative than spending. Just the opposite of the quote above. It looks to me like your extraordinary claim about helicopter money requires some extraordinary evidence.

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    1. American colonies lent it - So we had banks perform bank-money operations? In this case the helicoptering is NOT done by a central bank institution or system (whether green, blue, tall, short, independent, or any other adjective). The govt spends, it gives the money directly in doing this (a grant, a pension payment, a contract for services, loan guarantee claim, whatever).

      I think it is an interesting question though whether you suspect that a national government with its own currency can replace private banks in the modern era - both create money out of whole cloth, and both can lend for real economic purposes. So are you arguing that the govt should displace the banks in this function when they are not lending enough for real economy purposes??

      JF

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    2. JF:
      Actually, I favor getting the government out of the money and banking business. My point was that if the government insists on producing money, then history shows that lending it into existence works better than spending it into existence. I was also hoping to see what evidence Simon had to support his claim that "We know helicopter money is much more effective at stimulating demand."

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    3. "Most observers at the time said that lending was more stimulative than spending."

      Well, what would be nice are: 1) sources for this claim, and 2) support for the validity of those observations and subsequent claims. Who said lending was more stimulative than spending, and why should we believe them?

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    4. Mike Sproul,

      I just don't know what you mean by lending it into existence.

      Spending is the term used when the public's law and policy is being executed (think defence, think pension or social security outlays) and/or the govt institutions are buying something for themselves to use, spending for to pay their employees' compensation.

      Banks borrow from the central bank when they need to cover end-of-period accounting positions. They can get this almost without any qualifying filter (unlike a real commercial loan, well a prudent one, at least).

      Helicopter money refers the govt spending, chose any type, where they would instruct the entity that prints its currency to send it the the outside party (in reality it would be an electronic transfer in most cases, but not always) - pay a contractor bill, pay an employee, make a pensioner's deposit, etc. etc. The contractor/group who prints the currency just does it.

      No need to go to a central banker except to inform them of the amount for the stats on money supply; no need to also print a public debt instrument on another form of a white paper, or record this either; just administratively act so the outside party is paid real money (that they use as they will and/or in accordance with contractual and statutory terms, if applicable).

      Govts do make loans. In the US the small business administration does this, there has always been farm credit lending, and now education loans. I understand this lending. Is this what you mean?

      JF

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    5. JF:
      The colony might print 100 paper shillings and lend them to a farmer who offered land worth 200 shillings as collateral. Making loans increased the money supply and repaying them reduced it. The 100 paper shillings would appear on the liability side of the colony's balance sheet, while the farmer's IOU would appear as the colony's asset. As long as assets moved in step with money issue, the money would hold its value.

      Sorry I'm pressed for time and can't find the citation about the stimulative effect of lending vs. spending. Probably from Leslie Brock, Curtis Nettels, or Andrew McFarland Davis. I've seen it in enough old writings that I'm convinced it was a general opinion.

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    6. Mike Sproul, OK, understand. This worked then because the land was found-land, no one had to convert their wealth into ownership first. How would this work now?

      For instance, would we say to a hard working person that we will lend them money over a 30 year life-cycle and they would pay back the principle and interest on a schedule over this period, based on recognizing that they have human capital as collateral? Isn't that almost like a guaranteed income, and why must we establish the overhang of debt on someone (even a debt of a beneficent nature - it is still debt).

      An other example: Imagine that the govt would offer loans to people to whom no one else would lend otherwise, using something as collateral (as would any other lender normally). The govt would expect some of these loans to be non-performing (hence they become grants). The US does this now for education loans, arguably these reflect the investment in human capital that would earn sufficiently to pay the principle and interest back.

      Example you have in mind? And why is the govt concerned about the holding of value across the period??

      Thanks for the comment.

      JF

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    7. JF:
      If I own 200 shillings worth of land, I can use it as collateral on a 100 shilling loan regardless of how I acquired the land, by purchase, inheritance, gift, or "finding".

      If the government instead lends me 100 shillings, with no collateral except my character, then it's not a guaranteed income, it's a loan. If I don't pay it back, then the government loses assets, the money loses backing, and inflation results.

      I don't know what you mean by "holding of value across the period". The government just makes loans, and expects them to be repaid like any lender.

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  18. What does indemnity has to do with FED's operations? Why would BoE need to be covered by indemnity clause?
    The funds for buying private securities was created by typing into computor by crediting accounts in FED client database. If all those securities end up empty, what was the cost for the FED?
    Total cost for the FED would be few moments of pressing keys on the keyboard. So why this needs to be guranteed by Treasury when there was no cost?

    Result from no cost: Banks saved from loosing on bad assets, and mandated reserves are still there, no need to sell government debts to fill back mandatory reserves which would have leaked away from mass defaults and loss on assets. No firesales needed to refill mandatory reserves where the source for government debt is.

    QE is about saving banks and its mandatory reserves that are used for government debts. It is not about financing government spending, only indirectly.

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  19. QE is not monetisation of public debt, only because there is no need for it.
    Bank reserves are the source for public debt. There are excesive reserves in banks today, excessive even of QE ammount of public debt held at FED. And FED pays interest to banks on that excess reserves.
    What is the difference if Treasury pays on excess reserves or on Treasuries that replaced those reserves? Those reserves are more then sufficient to fund what FED holds of government debt.

    Yes, those excess reserves would not be there since bad assets, which FED bought, would eat them away and force firesale of Treasuries or force FED to lower the ratio of mandated reserves. Maybe even go to 0 mandatory reserves like in Australia.

    QE is only about saving banks and only then possibly indirectly controling the cost of public debt. At 0 cost to anyone, unless they ask for indemnity from Treasury.

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  20. “Where does the Fed get the money to buy [assets],” Congressman Keith Rothfus asked the Chairman. “Do you create the reserves,” he queried in a follow up, receiving a simple “yes” from Bernanke. And finally, the money shot: are you printing money? “Not literally,” the Fed Chairman surprisingly responded.

    http://www.forbes.com/sites/afontevecchia/2013/07/17/bernanke-to-congress-we-are-printing-money-just-not-literally/

    So, what is the cost to FED or BoE if they buy assets of QE by typing into Computer Desk crediting accounts of CB clients? Why indemnity? Just to spite Treasury?

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  21. Distributional questions (ie who gets what) and legal restrictions (in place because of democratic deficit in relation to the distributional question) mean this is non-starter, surely.

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    1. Helicopter money is distribution ally positive. Give everyone the same; reduce poverty and inequality. What could be wrong with that?

      It also increases the consumption multiplier, because the poor save less.

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    2. Which is all fine, but is a political choice. Central Banks can't make that choice.

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  22. Thanks, Simon, for making it clear that "helicopter money" is not any different than an off-balance sheet government deficit. It is unclear to me why some people favor it over a "standard" (debt-financed) government deficit. As helicopter money adds to the total liabilities of the government it may have to be made up at some point through increased taxation. As you have pointed out in other posts (http://mainlymacro.blogspot.com/2015/02/the-burden-of-government-debt-again.html) there is a potential for government debt becoming a burden for future generations. Thus, we should not just leave them the debt but also the real capital to counterbalance it. Specifically, the government should run a deficit to improve infrastructure, education, invest in research etc. Dropping money on the private sector relies on the hope that it will do the necessary investments to justify that additional debt. Considering how much cash businesses are hoarding (even before the crisis) I have my doubts about that assumption.

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  23. If anyone is interested, I have written a blog post on helicopter money as an exact counterbalance to net foreign purchases of UK assets. It can be used as a means to counteract the effect of the current account deficit so that net debt does not rise and domestic money supply remains the same. This can also be reversed in case of trade surplus. It sets clear, defined and sensible limits on helicopter money so that the government is not involved.

    http://andricopoulos.blogspot.ch/2015/02/why-bank-of-england-should-write-off.html

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  24. Forgive my ignorance but why couldn't central banks just wire the helicopter money directly to the personal accounts of citizens, sidestepping any involvement of governments? Is it just a legal matter or is there some important mechanism that would be threatened by direct wiring?

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    Replies
    1. That’s a possibility, but it would involve the central bank getting bogged down in a VAST AMOUNT of bureaucracy: keeping tabs on who was still alive and who had died, and who was still in the UK and who had emigrated, and who was of an age that made them eligible for handouts, etc etc. Isn't it much simpler just to increase EXISTING forms of public spending: e.g. on roads, education, state pension or whatever? Alternatively, a right of centre government might choose to cut taxes.

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    2. The whole idea of helicopter money was based on governments being unwilling to spend more or cut taxes, so that it is up to the central bank to do something.

      Could a central bank not simply use data collected by the country's tax revenue service?

      besides the bureaucracy are there any fundamental objections to a central bank wiring money directly?

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    3. You say VAST AMOUNT OF BUREAUCRACY. But the relevant databases already exist. Universality is simpler than means-testing.

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  25. 1. The central bank is part of Gov't. (In the UK there are two shares, both owned by treasury). Control is exercised through giving the BoE an inflation target, currently 2%.
    2. It would be illegal for the BoE to credit a private account gratis.
    These are both separation of powers measures that seek to impose democratic control on gov't by limiting clientelism.
    So the helicopter question is: how can BoE hit 2% if the treasury will not fully cooperate, say because the party in power has nailed its colours to the austerity mast.
    Some say that monetary financing of govt debt by the CB is a kind of helicopter action in accounting terms. Others point to distributional effects of any policy to see if this true. The question is; after all the accounting is done, are people shopping in Lidl or paying berthing fees in Monaco.

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    1. “So the helicopter question is: how can BoE hit 2% if the treasury will not fully cooperate, say because the party in power has nailed its colours to the austerity mast.”

      One answer to that question is to forbid non-cooperation, which might sound an odd suggestion. But in fact that’s the system advocated by Positive Money and Richard Werner in their submission to Vickers. Under their system, some sort of central bank committee decides on the AMOUNT of new money to be created and spent, while political decisions like what proportion of GDP is allocated to public spending remains with politicians. And in fact that “forbidding of non-cooperation” is already in effect in that independent central banks can override stimulus decisions by treasuries.

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    2. I have to assume that Hugo Evans is right about the point that a central bank could not lawfully perform helicoptering. It is only common sense that a small group of people behind closed doors would be permitted to just send out newly-minted currency, especially without direction from some outside source - like a public law.

      Helicopter money is a term that is used not in reference to a central bank doing it, but in reference to the govt doing it by law (they could direct any institution administer it, like a central bank, as long as the other entity that does the currency-printing knows it must comply and get the money out).

      The only thing I would like to see is a central banker going before the legislature and requesting that it direct helicoptering to be done instead of borrowing the money. That would get people's attention and invite questions of why the tax collections are insufficient to cover the execution of the public's law! It would invite questions about the plans for spending too, of course.

      Central bankers should go on public record as asking for fiscal policy to change.

      JF

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  26. You say it is illegal. But the law can be changed!

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  27. No comment on helicopter money, but a comment on the reasoning: we cannot depend on the economic rationality of governments in the face of their partisan political interests, real or (mis)perceived. To reason as if we can is to risk a fallacy similar to "rational markets" theory.
    Andrew Johnson

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  28. Hi, I have a question that doesn't seem to have been addressed in the story of low German wage inflation during the bubble years (sorry, it's off topic for this post).

    How did Germany do it? It's a market economy, if demand was not deficient then how did they arrange to keep wage inflation so low? They can't all have gotten together and agreed to do it could they?

    If you could do a post on that I'd be grateful.

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    Replies
    1. "They can't all have gotten together and agreed to do it could they?"

      Actually they did just that. The "Rhineland model" facilitates this through negotiations between large labor unions and representatives of employers, nationwide, as well as between employees and management within companies. of course the federal government and the states also simply employ a lot of people directly. There's also definitely a cultural component involved, but don't go saying out loud that perhaps Greece and Italy lack that cultural component, you can be labeled a Nazi when you do.

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    2. "Actually they did just that. The "Rhineland model" facilitates this through negotiations between large labor unions and representatives of employers, nationwide, as well as between employees and management within companies."

      Mainstream US and UK economists owe an apology to Tobin and many others. This is indeed an example of very successful prices and incomes policies.

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  29. hallo

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