Thursday, July 28, 2016

Bill Mitchell — Overt Monetary Financing would flush out the ideological disdain for fiscal policy

There was an article (May 24, 2016) – Helicopter money: The illusion of a free lunch – written by three institutional bank economists (two from the BIS, the other from the central bank of Thailand), which concluded that Overt Monetary Financing (OMF), where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector, was “too good to be true”, in the sense that it “comes with a heavy price” – summarised as “giving up on monetary policy forever“. The argument they make is very consistent with the work that Modern Monetary Theory (MMT) proponents have published for more 20 years now, which is now starting to penetrate the mainstream banking analysis. However, the conclusion they draw is not supported by the original MMT proponents who would characterise OMF as a highly desirable policy development, more closely representative of the intrinsic monetary capacity of the government. The article also raises questions of what we mean by a “free lunch”, a term which was popularised (but not invented) by Monetarist Milton Friedman. Its use in economics is always loaded towards the mainstream view that government interventions are costly. But if we really appraise what the term “no such thing as a free lunch” really means then, once again, we are more closely operating in the MMT realm which stresses real resource constraints and exposes the fallacies of financial constraints that are meant to apply to currency-issuing governments.…
Bill Mitchell – billy blog
Overt Monetary Financing would flush out the ideological disdain for fiscal policy
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also
Below we present selected excerpts from Koo's full "cost-benefit analysis" of helicopter money, and specifically the four forms it could take, and why each of them is ultimately doomed.
Zero Hedge
Richard Koo: If Helicopter Money Succeeds, It Will Lead To 1,500% Inflation

5 comments:

Kristjan said...


"Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves.

That implies that if businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the UK."

Koo cannot be taken seriously. He is a true believer in money multiplier.

Michael Spacey said...

i see nothing wrong with Koo's statement there. if business and household borrow in earnest that would obviously expand money supply - M2/M3 or whatever you look at. Would you not agree?

Tom Hickey said...

Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves. That implies that if businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the UK. Once private-sector demand for loans recovers in these countries, confidence in the dollar, euro, and yen will plummet unless the Fed reduces excess reserves to one-fifteenth of their current level, the ECB to one-fifth, and the Bank of Japan to one-twenty-eighth.

Quantity theory and money multiplier.

MRW said...

Michael Spacey, Quantitative Easing is not the same as Helicopter Money.

Quantitative Easing does not alter the money supply if you believe like me that QE is an asset swap. (Whether the payback on the treasury security is paid by the US Treasury or the Fed is immaterial. That money was already clocked as part of the money supply when originally issued.) In fact, the interest income those treasury securities generate were removed from the real economy and returned to the federal government annually under the 1947 or 1948 law that requires all net Fed profits to be returned to the US Treasury. It added reserves for the banks--did not increase the money supply--and increased the value of the dollar since 2008 because there were less of them in the real economy.

Kristjan said...

"i see nothing wrong with Koo's statement there. if business and household borrow in earnest that would obviously expand money supply - M2/M3 or whatever you look at. Would you not agree?"

But that would have nothing to do with excess reserves.

"When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money."

Koo is saying the liquidity is the constraint that needs to be applied.