Seven years on from the great financial crisis and despite central banks being seen by many as ‘the only game in town’, there has been a renewed push for monetary policy to experiment even further. One of the latest proposals is the revival of Milton Friedman’s ‘helicopter money’. But have all the implications of what many see as central banks’ ‘nuclear option’ been fully appreciated? This column argues that this is not the case. Realising the benefits that its proponents claim exist would require giving up on interest rate policy forever.…
Given the intrinsic features of how interest rates are determined in the market for bank reserves (bank deposits at the central bank), the central bank faces a catch-22. Either helicopter money results in interest rates permanently at zero – an unpalatable outcome to most, including those that advocate monetary financing1 – or else it is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the desired additional expansionary effects.This seems wrong to me. The central bank could continue to set rates by paying IOR. [Scott Fullwiler addresses this in the comments.]
This seemingly innocuous technical detail has major implications. The central bank can of course implement a permanent injection of non-interest bearing reserves and accept a zero interest rate forever (scheme 1). This produces the envisaged budgetary savings but at the cost of giving up completely on monetary policy. If the central bank wishes to avoid that outcome, it has only two options.3 It can pay interest on reserves at the policy rate (scheme 2), but then this is equivalent to debt-financingfrom the perspective of the consolidated public sector balance sheet – there are no interest savings.4 Or else the central bank can impose a non-interest bearing compulsory reserve requirement equivalent to the amount of the monetary expansion (so that excess reserves remain unchanged – scheme 1), but then this is equivalent to tax-financing – someone in the private sector must bear the cost.5 Either way, the additional boost to demand relative to temporary monetary financing will not materialise.Seems to confuse monetary and fiscal. What actually acts like a tax is not paying interest on debt, which would increase the aggregate net financial assets of non-government, with the helicopter infection doing so instead.
The difference is that the liability in this case would slow up on the books of the central bank rather than the Treasury.
What would disappear is the illusion of the intertemporal budget constraint, replaced by the illusion of "free money." Money is never "free" in that it is a financial instrument and financial instruments are always recorded as a liability on the issuer's balance sheet.
VoxEU
Helicopter money: The illusion of a free lunch
Claudio Borio, Head of the Monetary and Economic Department, Bank for International Settlements; Piti Disyatat, Director of Research, Bank of Thailand.and Anna Zabai, Economist, Bank for International Settlements
32 comments:
"Given the intrinsic features of how interest rates are determined in the market for bank reserves"
Should be: given the intrinsic feature of how exchange rates are regulated via the market for bank reserves...
And govt regulates/controls the risk free INTEREST rate on the bank reserves...
Basic point--there's no such thing as "printing money." All deficits are helicopter drops unless you want ZIRP forever.
Thanks, Scott. A question if you have time.
Would't the cb still have the option to set the interest rate above zero using IOR as it has under QE? The authors seem to imply that the cb could not chose this alternative.
The difference between QE and HM seems to me to be that QE is an asset swap, whereas HM increases aggregate non-government net financial assets. So QE is monetary and HM is fiscal.
Both QE and HM add reserves to the payments system without a reserve drain (which is the function of tsys issuance), so they would both drive the interest rate to zero in the interbank market. The Fed has prevented this in the case of QE by using IOR. Seems they could do the same with HM?
The Fed has prevented this in the case of QE by using IOR. Seems they could do the same with HM? Tom Hickey
Sure if you're comfortable with welfare proportional to wealth rather than need. T'would be a tough call to defend on Judgement Day, do you think?
How about this instead? Distribute the helicopter money equally to individual citizen accounts* at the central bank and abolish government-provided deposit insurance.
Then what do you think overnight rates would be as banks scrambled to secure the needed reserves as people transferred at least some of their deposits to their inherently risk-free accounts at the central bank? They sure wouldn't necessarily be zero, now would they?
The banks have us trapped so long as we refuse to think outside the box they've constructed. The "natural rate of interest equal zero" meme is based on the assumption that depository institutions will continue to be privileged by government. Shame on those who insist on thinking so, such as Yves Smith, who has banned me at NC for insisting otherwise.
* By default, all future payments by the monetary sovereign should be made to individual, business, local government, etc. accounts at the cb and not, as now must be the case, to depository institutions.
"who has banned me at NC"
That sounds like a good call.
She had no reason to other than she could not refute my position. That's when I realized that Progressives aren't really interested in justice - just being in charge of the injustice. Or else she's been blinded by the god of this world.
I suspect the latter since her counter-arguments were pathetically lame. So lame that they must have even embarrassed her, an otherwise intelligent person.
Hi Tom
"Would't the cb still have the option to set the interest rate above zero using IOR as it has under QE? The authors seem to imply that the cb could not chose this alternative. "
Yes. But Borio/Disyatat's point is that then you've got the equivalent of debt service, which is correct. So, the choice is debt service or ZIRP forever. The latter means--in their paradigm, anyway--that the CB has nothing to do. The former could threaten CB independence if the helicopter money grows so large that the debt service leads monetary policy to have perverse effects. These are all from their standard model. They're just saying helicopter money doesn't really do anything different from a deficit, and they're right--but they're doing it in the context of warning against helicopter money.
Hi Andrew
"How about this instead? Distribute the helicopter money equally to individual citizen accounts* at the central bank and abolish government-provided deposit insurance."
I've proposed much the same thing, except I'd use TreasuryDirect accounts since those already exist and it's basically the same thing.
"Then what do you think overnight rates would be as banks scrambled to secure the needed reserves as people transferred at least some of their deposits to their inherently risk-free accounts at the central bank? They sure wouldn't necessarily be zero, now would they?"
right. particularly if you allowed individuals to sweep bank balances into the TreasuryDirect accounts overnight. The rate would basically arbitrage with the CB's target rate since that woudl be the alternative cost of funds for banks--there'd be no reason for them to pay depositors more than that. So, now it depends on what the CB's target rate would be.
"The banks have us trapped so long as we refuse to think outside the box they've constructed. The "natural rate of interest equal zero" meme is based on the assumption that depository institutions will continue to be privileged by government. Shame on those who insist on thinking so, such as Yves Smith, who has banned me at NC for insisting otherwise."
You're misrepresenting what "natural rate of interest is zero" means, at least in the papers MMT economists have published.
"* By default, all future payments by the monetary sovereign should be made to individual, business, local government, etc. accounts at the cb and not, as now must be the case, to depository institutions."
I would prefer that, too. Wouldn't be that hard, at least operationally
Thanks, Scott.
Andrew how could a bank get paid the ior FIRST and THEN pay the deposit interest?
And how could a bank pay MORE interest on a deposit balance than the ior which we can see happening all the time?
Why would a bank have "need ed reserves" if it didn't have any deposits?
What would stop a bank from offering its own bonds a bit above the policy rate and use these securities to create the liabilitiy instead of deposits?
Just go to a credit union if you hate bankers this much.... Get back at them that way....
And Btw God could care fing less if we charge each other interest or pay each other interest these days.... You might as well just join the rest of Christendumb and torment homosexuals 24/7 if you are worried about shit like this....
"I've proposed much the same thing, except I'd use TreasuryDirect accounts since those already exist and it's basically the same thing." stf
I doubt it and whatever for? So depository institutions can continue to receive special privileges?
No, let's just stick with central bank accounts for all citizens and their businesses and quit treating depository institutions as anything more than ordinary businesses.
"particularly if you allowed individuals to sweep bank balances into the TreasuryDirect accounts overnight." stf
Sure, instant check clearing would make that possible but again those accounts should be alongside the accounts of depository institutions as equal peers.
The rate would basically arbitrage with the CB's target rate since that woudl be the alternative cost of funds for banks--there'd be no reason for them to pay depositors more than that. So, now it depends on what the CB's target rate would be.
stf
I failed to mention in my comment that ALL new fiat creation, besides normal deficit spending by the monetary sovereign, should be via equal fiat distributions into individual citizen accounts at the central bank, ie "helicopter drops." So the central bank would not have the power to create fiat except for the monetary sovereign. If the monetary sovereign, eg. US Treasury, deemed interest rates were too high, it could lower them via increased deficit spending (including "helicopter drops"). If interest rates were deemed to be too low (ie. price inflation too high) then the monetary sovereign could raise taxes or cut spending (especially "helicopter drops") and wait till production catches up, preferably the latter.
You're misrepresenting what "natural rate of interest is zero" means, at least in the papers MMT economists have published. stf
I don't think so since individuals, businesses, State and local governments etc. have liquidity needs that exceed in aggregate those of depository institutions and a risk-free savings preference too. So if individual, business, State and local governments etc. accounts were allowed at the central bank and all other privileges for depository institutions were eliminated, especially government provided deposit insurance and fiat creation by the central bank (except for the monetary sovereign) and if all spending by the monetary were directed by default to those individual, business, State and local governments etc. accounts then the banks, etc. would have to pay genuine market rates for fiat (aka "reserves") and those might or might not be low, depending on how much fiat individuals, businesses, etc. have to lend and not the central bank.
"Wouldn't be that hard, at least operationally" stf
Nor politically since once everyone may have an account at the central bank then it would only be natural for all payments by the monetary sovereign, eg. US Treasury, to be directed to those accounts by default and not to sub-accounts at depository institutions, as now must be the case.
And since accounts at the central bank are inherently risk-free then the abolition of government-provided deposit insurance would be only natural too.
And since the abolition of government-provided deposit insurance would require a huge amount of new fiat for the transfer of at least some currently insured deposits to inherently risk-free accounts at the central bank then an equal fiat distribution to all citizens (a "Helicopter Drop") follows too.
"I doubt it and whatever for? So depository institutions can continue to receive special privileges? "
TsyDirect are accounts at the US Tsy, not banks. No reason for banks to be involved at all unless someone wants to transfer balances to a bank.
"No, let's just stick with central bank accounts for all citizens and their businesses and quit treating depository institutions as anything more than ordinary businesses."
As above.
"Sure, instant check clearing would make that possible but again those accounts should be alongside the accounts of depository institutions as equal peers."
That's the same point I made, so yet.
"I failed to mention in my comment that ALL new fiat creation, besides normal deficit spending by the monetary sovereign, should be via equal fiat distributions into individual citizen accounts at the central bank, ie "helicopter drops." So the central bank would not have the power to create fiat except for the monetary sovereign. If the monetary sovereign, eg. US Treasury, deemed interest rates were too high, it could lower them via increased deficit spending (including "helicopter drops"). If interest rates were deemed to be too low (ie. price inflation too high) then the monetary sovereign could raise taxes or cut spending (especially "helicopter drops") and wait till production catches up, preferably the latter."
No need to do that, and it won't work operationally anyway given the quantities involved. No central banks out there actually change interest rates by adjusting the qty of reserves. Much simpler to just announce a rate and pay that on TsyDirect accounts (or CB accounts, if you prefer, for the sake of argument). If you want a different interest rate, just announce a new one and pay that rate on the accounts.
"I don't think so since individuals, businesses, State and local governments etc. have liquidity needs that exceed in aggregate those of depository institutions and a risk-free savings preference too. So if individual, business, State and local governments etc. accounts were allowed at the central bank and all other privileges for depository institutions were eliminated, especially government provided deposit insurance and fiat creation by the central bank (except for the monetary sovereign) and if all spending by the monetary were directed by default to those individual, business, State and local governments etc. accounts then the banks, etc. would have to pay genuine market rates for fiat (aka "reserves") and those might or might not be low, depending on how much fiat individuals, businesses, etc. have to lend and not the central bank."
None of this has anything to do with the MMT argument that 0 is the "natural" rate. It's a completely different point about operations and sector balances, and doesn't necessarily have anything to do with what the interest rate target should actually be.
"Nor politically since once everyone may have an account at the central bank"
THAT's the politically hard part, but yes, if you get over that hurdle then you're golden. TreasuryDirect accounts already exist, and would do the exact same thing. No need to bother w/ banks if one didn't want to since the Tsy already uses the Fed's clearing/settlement systems.
"so yet" above should be "so yes"
Much simpler to just announce a rate and pay that on TsyDirect accounts (or CB accounts, if you prefer, for the sake of argument). If you want a different interest rate, just announce a new one and pay that rate on the accounts. stf
That's welfare proportional to wealth, not need.
The ethical way to lower interest rates is via equal fiat distributions to all citizens with the central bank unable to create fiat except for the monetary sovereign, eg. US Treasury. And who cares if that requires huge amounts of new fiat since that would reverse a huge amount of wealth inequality even if the rich got equal amounts which they should so they can't squawk about unfairness?
And why the insistence on Treasury Direct? What's the hidden agenda? Then let's abolish the Fed and let the banks, etc. have accounts there too with no special privileges.
And besides, those accounts DO NOT exist. When I attempted to get a Treasury Direct account, I was informed I needed a form from my bank. What in blue blazes for. I ask you?
Scott, how close is Andrew Anderson's plan to Bill Mitchell's recommendation subsequent to the crisis to nationalize banking, since Bill doesn't think that it's feasible to reform the existing system successfully owing to the power structure (at leasts this is how I understand him). Is there any relevant MMT literature on this? Warren has put forth is proposals for reform but they are not fleshed out either, as far as I am aware.
Greater government involvement is obviously a political hot potato since many would view it as a form of "big government socialism." Of course, others would view that as a feature rather than a bug. It's not inconceivable that something like this could emerge from a future crisis.
"THAT's the politically hard part," stf
It shouldn't be at all since it's just the application of Equal Protection under the Law, in an Amendment to the US Constitution (14th?) meant to abolish slavery and which now can be used to abolish debt and wage slavery.
"but yes, if you get over that hurdle then you're golden." stf
And who can legitimately oppose it? Let them try I say. I can tell you from experience that no one can. On the contrary, "Jamie", over at NEP, whom I assume is James K Galbraith, says this:
"aka you have been proposing this here for some time and I finally get what you are talking about… it’s an interesting idea. But having an account and having easy access to it are two different things. That is what neighborhood banks currently provide (imperfectly: impoverished communities are lamentably under served). Coupled with the notion of the Post Office Bank, though, this could provide a real solution to many ills, I think. In any event, some thought must go into how such accounts would be accessed (especially by people without computers and internet) and what infrastructure would be needed to be built out to make them widely useful." http://neweconomicperspectives.org/2016/01/money-banking-part-3.html#comment-1232620 [bold added]
Greater government involvement is obviously a political hot potato ... Tom Hickey
It's only proper that the monetary sovereign provide an inherently risk-free storage and transaction service* for its fiat for all citizens and not leave the population at the mercy of depository institutions.
Banks, etc would still exist but as 100% private businesses with 100% voluntary depositors.
*This will be abundantly clear if physical fiat is abolished since then citizens shall not be able to deal with their nation's fiat, at all! Banks, etc would be, de facto, the only true citizens of a nation, which is largely the case even now.
"And besides, those accounts DO NOT exist. When I attempted to get a Treasury Direct account, I was informed I needed a form from my bank. What in blue blazes for. I ask you?"
Yes, they do. I have one. My daughter has one. They aren't yet deposit accounts--just for savings or purchasing Tsy's. Easy to change them to deposit accounts, though. I'm not against CB accounts and not saying they wouldn't work, I'm just saying you can have the same thing with TsyDirect. You could also do it with postal accounts. Everything you want with the CB accounts you could specify for those, too. That's all I'm saying.
"The ethical way to lower interest rates is via equal fiat distributions to all citizens with the central bank unable to create fiat except for the monetary sovereign, eg. US Treasury. And who cares if that requires huge amounts of new fiat since that would reverse a huge amount of wealth inequality even if the rich got equal amounts which they should so they can't squawk about unfairness?"
No problem with the equal parts, etc, but that will happen anyway when you simply announce a new rate and start paying that instead, again, in equal parts. But you simply can't change the rate the way you're suggesting it. It's not the way the operations actually work.
"It shouldn't be at all since it's just the application of Equal Protection under the Law, in an Amendment to the US Constitution (14th?) meant to abolish slavery and which now can be used to abolish debt and wage slavery."
I used to think if I just made the "correct" argument that everyone would agree with me, too, and change would then be easy. I'm not saying you're wrong or that I wouldn't be in support, I'm saying getting the people that can institute the change to vote your way is the difficult part.
A case can be made for this that would take advantage of the popular belief that money created by government rather than banks. Many if not most people would be surprised to learn that banks create most of the money. based on credit. The few that do understand this also misunderstand it in terms of "fractional reserve banking."
The strategy would be to explain the present system and now popular belief about it is mistaken.
The a new system could be proposed in which government does actually create all the money and all nongovernment financial institutions merely intermediate between savers and borrowers by lending existing savings.
Write it up and put it up as a Kindle book at Amazon or an ePub at the Apple Store or an alternative like Smashwords.
Just to be clear, I would not be for doing anything like this, which vastly increases the power of government, under the existing governmental arrangements, which are oligarchic. The belief might be that do something like this would undercut oligarchy, but I am skeptical of that, just as I am that a JG alone would solve the political issues surrounding neoliberalism as the dominant political theory in the West.
Socialist solutions require actual socialism. Giving government greater power and control in a capitalist system, which is by definition oligarchic, is not socialism.
I'm just saying you can have the same thing with TsyDirect. You could also do it with postal accounts. Everything you want with the CB accounts you could specify for those, too. That's all I'm saying. stf
"Separate but equal" has been tried if you'll recall and it failed. There should be NO DISTINCTION between banks, etc. and ordinary businesses and citizens wrt to fiat accounts. It's a symptom of cognitive capture to even think there should be.
As for postal accounts, those don't deal with actual fiat but like accounts at commercial banks with mere CLAIMS (ie. liabilities) to fiat leaving the Postal Bank in charge of the actual fiat backing those accounts. Otoh, individual citizen, etc. accounts at the central bank would deal with actual fiat, just like the banks do, and couldn't be subverted by fiat lending behind the backs of the account holders - assuming the cb is forbidden from fiat creation except for the monetary sovereign.
No problem with the equal parts, etc, but that will happen anyway when you simply announce a new rate and start paying that instead, again, in equal parts. stf
Huh? So 5%, say, of the $10,000,000 account balance of one of the rich equals 5% of the $100 account balance of one of the poor? Since when? Bill Mitchell calls interest paying sovereign debt "corporate welfare." IOR is no different.
Socialist solutions require actual socialism. Tom Hickey
Since when is equal protection under the law wrt to fiat socialism?
Giving government greater power and control in a capitalist system, ... Tom Hickey
You mean the power to do simple accounting and transactions with its own fiat? And not lose it as the banks are apt to do?
Rather, since when does equal protection under the law wrt to fiat REQUIRE socialism?
It doesn't.
We are going in circles, Andrew. Good luck to you!
Maybe a spiral but not circles.
The war between the banks and the people has been going on for centuries. Allow the banks the slightest advantage or distinction and they'll eat you alive eventually.
That's why strict regard to ethics wrt to fiat creation is essential and why on earth would you oppose that anyway? Seriously.
This reflexive defense of privileges for the banks is uncanny. If I didn't believe the Devil existed before I started this learning experience 8 years ago, I do now. Privileges for the banks must be a top priority for him.
Of course God is our Judge and not the Devil or the banks and He is the one to be feared and obeyed. I've done my part but I'm getting weary of stubborn, unwarranted defense of the indefensible. Per the Bible, your blood is on your own head if you won't heed.
Since when is equal protection under the law wrt to fiat socialism?
Economics liberalism (capitalism) leads to oligarchy, and under oligarchy there is a double standard of justice. In Orwellian terms, some are more equal than others.
If there was any doubt about this, the financial crisis has proven it in spades.
As long as capital is privileged there will be a privileged class and unequal justice.
The basis of liberal socialism is social and political liberalism in which all are equal and there is no privilege, no government capture, and no rent extraction. Economic liberalism in the current sense of capitalism is incompatible with social and political liberalism.
Conversely, economic liberalism as capitalism holds that economic liberalism is identical to political liberalism.
There is no reconciling these views.
The war between the banks and the people has been going on for centuries. Allow the banks the slightest advantage or distinction and they'll eat you alive eventually.
The same can be said for hierarchical governments, and governments have done far, far more damage than banks ever could.
Economics liberalism (capitalism) leads to oligarchy, and under oligarchy there is a double standard of justice. In Orwellian terms, some are more equal than others. Tom Hickey
The lack of a government-provided, inherently risk-free fiat accounting and transaction service for all its citizens mean the banks have always, at least in the US, enjoyed a huge implicit subsidy from government. Then why do you call that condition "Economics liberalism" when it is clearly socialism for the banks and the rich, the most so-called creditworthy, aka fascism?
And obviously, "economics liberalism", the current system, even such as it is, has PRODUCED a great deal of wealth and innovation so it must have A LOT going for it - hence the resistance to any proposed alternative. But equally obviously and quite predictably that wealth has not been justly shared. We could probably have had the wealth and innovation and just sharing too but for both implicit and explicit subsidies for the usury cartel and the rich, the most so-called creditworthy.
The same can be said for hierarchical governments, and governments have done far, far more damage than banks ever could. Tom Hickey
A major cause of World War II was the Great Depression and THE cause of the Great Depression was government-subsidized private credit creation. Even Ben Bernanke admitted the Fed was at fault for the Great Depression.
Moreover, government is a given. What is not a given is that government should subsidize private credit creation.
The central bank can of course implement a permanent injection of non-interest bearing reserves and accept a zero interest rate forever (scheme 1). stf
Eliminate all privileges* for depository institutions and the economy will largely abandon bank credit and deal directly with fiat. Then who can say what interest rates in fiat will be? Given the greatly increased use of it? And if interest rates are deemed to be too high then distribute more fiat equally to the citizens to lower them.
Low interest rates are fine but ONLY if they are produced ethically. Fiat creation by the central bank for the benefit of the banks and the so-called creditworthy is NOT ethical. OTOH, equal fiat distributions to all citizens ARE ethical and could drive interest rates to near zero if desired.
We are playing with fire to subsidize usury and oppression of the poor as any believer in Scripture (or just student of history) should know.
*but without deflation via equal fiat distributions to all citizens.
Fiat creation by the central bank for the benefit of the banks and the so-called creditworthy is NOT ethical. aa
Prime example: Jobs have been automated away with the legally stolen purchasing power of the workers via government-subsidized private credit extended to their so-called creditworthy employers.
Automation is good but ONLY if it is ethically financed. Then we can all benefit and not just a few.
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