Those poor central banks, they tried so hard

This sort of thing (from The Economist) makes me want to tear my hair out:

Despite central banks’ efforts, recoveries are still weak and inflation is low. Faith in monetary policy is wavering.

Seriously?  After the Fed raised rates in December, despite “low” inflation and a “weak” recovery, people are still claiming that the poor central banks tried hard to inflate, but that it was just too difficult?  This sort of thing is beyond clueless, it almost leaves me speechless.  What world is the Economist living in?  How hard is it to understand that the Fed raised rates to prevent inflation from rising?  This is not rocket science.

And “effort”?!?!?  How much effort does it take to print currency and buy assets? We aren’t talking about storming the beaches of Normandy, or sending a man to the moon, or building the transcontinental railroad. I know that modern governments have almost completely lost the ability to produce substantive physical infrastructure (except for China.)  But are we to believe that even printing money now requires too much “effort”, and that we need to give those poor souls a break from their arduous duties?  My God! No wonder Trump is doing well, the entire technocratic class in the West is a bunch of worthless lazy bums.  Can’t they do anything?  Even debasing a currency is beyond their ability?

I’m reminded of an old Monty Python routine:

Screen Shot 2016-02-18 at 10.15.21 PM

But it gets worse.  The line I quoted might just be a slip of the tongue.  But consider this:

The time has come for politicians to join the fight alongside central bankers. The most radical policy ideas fuse fiscal and monetary policy. One such option is to finance public spending (or tax cuts) directly by printing money—known as a “helicopter drop”. Unlike QE, a helicopter drop bypasses banks and financial markets, and puts freshly printed cash straight into people’s pockets. The sheer recklessness of this would, in theory, encourage people to spend the windfall, not save it.

So let’s see.  We print up a zillion dollars, or euros, or whatever.  What are we going to do with all this money?  Well, we could buy assets.  Perhaps create a sovereign wealth fund, like those lucky countries have, you know, Singapore, Norway, UAE, etc.  Or, we could just give it all away, and continue down the road toward being a bankrupt, debt-ridden economy like Greece.  Hmm, decisions, decisions . . .  don’t rush me . . .

I know, let’s do a helicopter drop, because the sheer recklessness of it sounds neat.  Isn’t that what we were taught in grad school back in the 1970s, just print lots of money and give it away?  Sovereign wealth funds are so boring, and we’d have to keep track of the financial markets.  Giving away money is so much more fun.

PS.  I hope it’s clear I’m not advocating printing up money to create a sovereign wealth fund, I’m just trying to figure out why even that moronic idea (and it is certainly stupid) would not be superior to a helicopter drop.

HT: Jason

Update:  As usual, Tyler is much more polite than me:

So if in a monetary policy or macroeconomic analysis you read the phrase “out of options,” you would do well to substitute in “governments do not wish to pursue their remaining options.”


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65 Responses to “Those poor central banks, they tried so hard”

  1. Gravatar of Ray Lopez Ray Lopez
    20. February 2016 at 06:34

    Sumner: “How hard is it to understand that the Fed raised rates to prevent inflation from rising? This is not rocket science.” – never reason from a price change. STRIKE ONE.

    Sumner: “I know, let’s do a helicopter drop, because the sheer recklessness of it sounds neat.” – it’s not reckless to give a tax cut to every American. STRIKE TWO.

    Sumner: ” I hope it’s clear I’m not advocating printing up money to create a sovereign wealth fund, I’m just trying to figure out why even that moronic idea (and it is certainly stupid) would not be superior to a helicopter drop.” – well, it’s not necessarily superior. FOUL TIP.

    You have two strikes against you; three strikes and you’re out!

  2. Gravatar of Brian Donohue Brian Donohue
    20. February 2016 at 06:49

    Tyler has been doing a bunch of monetary policy posts. The reaction is depressing.

    The stupidest current idea floating around is that when the Fed prints money and buys a bond in the open market, the entity that sells that particular bond to the Fed has some kind of first mover advantage.

    A lot of inchoate rage. Money make people cray cray.

  3. Gravatar of Ken Duda Ken Duda
    20. February 2016 at 06:54

    Scott:

    > I’m just trying to figure out why even that moronic idea (and it is
    > certainly stupid) would not be superior to a helicopter drop.

    Do you mean in reality, or in the mind of the speaker?

    In the mind of the speaker, this is easy. The narrative is that every dollar printed increases demand for assets but then just sits in bank reserves, i.e. increasing M, reducing V, and “inflating” asset prices. If you want higher NGDP, so goes the narrative, you need to increase cash in pockets with some marginal propensity to spend, which are not the people already holding zero-yielding bonds. Asset swaps have no effect if cash is just another safe asset.

    I recognize that in reality, sufficient monetary expansion would drive increased spending. So many people fail to see this because they equate low interest rates or base expansion with expansionary policy. They can’t see that Fed policy keeps the potatoes so darned cold that the monetary base has been sterilized. Which is odd, because that was Bernanke’s explicit goal in paying IOR — he wanted to provide liquidity to the banks (increased M) without actual monetary expansion (i.e., without increasing M*V). And it worked!

    As you know, I wonder about softening the MM position here, so we can align with the Economist/Keynesian narrative rather than fight it endlessly. After all, what *would* a good MM do if an NGDP futures market predicted below-target NGDP as far as the eye could see regardless of monetary expansion? Hell freezing over, maybe, but presumably anyone who believes in ZLB monetary impotence would also believe the prediction market would predict monetary impotence. So: what if it did? What would a good MM do? It’s an important theoretical question in my mind because the answer leads to a resolution of the endless Keynesian/MM debate over the possible effectiveness of fiscal policy, at which point maybe we can work together better in demanding better monetary policy in this country.

    -Ken

  4. Gravatar of Ken Duda Ken Duda
    20. February 2016 at 06:56

    Test comment — if this posts, then kjd@duda.org was banned. If it doesn’t, then my browser has an issue.

  5. Gravatar of Ray Lopez Ray Lopez
    20. February 2016 at 07:09

    @BD – “when the Fed prints money and buys a bond in the open market, the entity that sells that particular bond to the Fed has some kind of first mover advantage” – it’s not hard to figure out, just use a stock market analogy. The people who bought Google on the first day of trading (and I remember it was a hot stock even back then) had a “first mover advantage”. That goes even for stocks that end up bankrupt (the first mover advantage is negative, but still present). Anything else you unclear about? Just ask, we’re here to help you Brian.

  6. Gravatar of Joe Joe
    20. February 2016 at 07:19

    Yeah, very depressing reading that Economist report. Sometimes they seem so close to understanding that monetary policy is actually tight. Then they go off recommending we build a bunch of bridges to nowhere. Also annoying is the consistent drone of the financial press that low oil prices are causing markets to crash. Seriously? Even airlines are down “because” of low oil prices? Crazy…

  7. Gravatar of Ricardo Urdaneta Ricardo Urdaneta
    20. February 2016 at 07:20

    The Economist is not the source of solid common sense it was until not long ago. Zanny Minton Beddoes seems apparently wants to turn it into a mainstream, politically correct, intellectually undemanding mush.

  8. Gravatar of AD AD
    20. February 2016 at 07:32

    Is the reason you describe the “helicopter drop” as moronic because it doesn’t give the Fed as much of an ability to reduce the money supply later?

  9. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 07:44

    Scott seems unaware that central banks don’t print money. Perhaps he’s confusing the Fed with the Treasury? Certainly wouldn’t be the first (and definitely won’t be the last) time he’s deeply confused about something.

    Oh and let me guess, QE doesn’t really represent “massive buying of assets” because of expectations, Wicksellian natural rates, or some other such self-insulating feature?

  10. Gravatar of Effem Effem
    20. February 2016 at 08:28

    The world is simply waking up to the fact that when your only transmission-mechanism involves driving up the fortunes of asset-owners relative to everyone else, you risk disastrous political instability.

    But I suppose we’ll have to wait for President Trump or Sanders to be in office until anyone really internalizes that. Outdated methods die hard.

  11. Gravatar of Benjamin Cole Benjamin Cole
    20. February 2016 at 08:49

    Well…do not forget Michael Woodford is a proponent of marrying QE to tax cuts or spending.

    I like the idea of monetizing the federal debt. Why not?

    And if a nation, a Switzerland or the United States, has a good enough government that investors around the world trust their assets in that nation, should not the citizens of that nation benefit?

    The Swiss National Bank purchased a lot of assets in an attempt to prevent the Swiss franc from appreciating. Evidently these assets are now viewed as a liability, as they may decrease in value causing losses for Swiss taxpayers!

    Would not the Swiss economy and the Swiss citizenry be better off if the Swiss National Bank had merely printed up money and paid taxes with it, while the Swiss taxpayers took a tax holiday?

    But in the main I agree with Scott Sumner. Yeah idea that the Fed is somehow tired or straining under a large balance sheet is just ridiculous. You would think that pillars in front of the Federal Reserve edifice are going to burst out from the strain. Those central bankers are tired out from typing on a computer keyboard to buy bonds from primary dealers.

    The Fed should digitize $100 billion a month.

    n

  12. Gravatar of Don Geddis Don Geddis
    20. February 2016 at 09:05

    @Crusher: Everyone knows that the phrase “print money” is used metaphorically, to refer to expanding the money supply. Which is what the central bank does, and it the significant action that matters for monetary policy.

    The actual printing of physical currency, which the Treasury does only in exchange for reserves, has no effect on the money supply, and no consequence for monetary policy or the macro economy. And, most importantly, the phrase “printing money” (in economics) does not refer to this unimportant printing of physical currency.

  13. Gravatar of Benoit Essiambre Benoit Essiambre
    20. February 2016 at 09:18

    Simple trick to make the comments more readable. Open your browser console (F12) and paste this:

    Array.prototype.forEach.call(document.querySelectorAll(‘.commentbody’),function(el){if(el.textContent.indexOf(‘Lopez’)>=0){el.style.display = ‘none’;};});

  14. Gravatar of Major.Freedom Major.Freedom
    20. February 2016 at 09:36

    Did anyone else notice that Sumner’s exasperations here sound indistinguishable from a drug addict whose dealer just never gives enough?

  15. Gravatar of Peter Peter
    20. February 2016 at 09:42

    Central banks send their profits to the government (are there any exceptions?). But what exactly counts as profit? I suppose this might differ between central banks. When a bond the Fed has bought is paid is the interest counted as profit?

  16. Gravatar of jknarr jknarr
    20. February 2016 at 09:51

    The Economist has been on a long, sad descent from Burkean liberty to authoritarian globalism for a long while now. It’s a sick parody, now.

    This shows what monetarism is up against. Global elites keep up tight monetary policies and cry impotence in order to impoverish the citizenry and centralize wealth power.

    Under monetarism, everybody gets “the money”. Under Keynes fiscalism, your elites get the money. So go with your little voter begging bowl to ask for some. You are not trusted.

    Everybody knows that they *could* use muscular monetary helicopter drops. They are trying to convince you that they can’t. In fact, it’s moving the other way, tighter. Vaporize the monetary base by eliminating currency, go negative rates, hammer the populace with debt-austerity; and centralize. Priceless!

  17. Gravatar of Joe Joe
    20. February 2016 at 10:18

    Benjamin, I’d monetize too if it were necessary. But for now I’d settle for the Fed CREDIBLY targeting a variable. In fact, if they stuck to the variable they already supposedly target, 2% inflation, we’d be far better off.

    I know Greenspan has taken a lot of flack for the supposed housing bubble, but I miss that guy. At least he paid attention to markets. No offense to Professor Sumner, but maybe academics aren’t the right choice for Fed chair…

  18. Gravatar of Britonomist Britonomist
    20. February 2016 at 10:34

    “Or, we could just give it all away, and continue down the road toward being a bankrupt, debt-ridden economy like Greece.”

    Like Greece? Greece is literally, in absolutely every single way possible, the exact opposite of a helicopter drop – Greece does not have a central bank and cannot print any money. Therefore all spending is debt financed, and worse, it’s *external* debt in an external currency it has no control over and could not possibly monetize. That’s an extremely terrible example to use of anything. In fact, Greece is the classic example of what happens when you CAN’T do helicopter drops – a Euro straitjacket.

    The entire point of a helicopter drop is to spend *without being debt ridden*, again for the second time – if it increases debt, it is not a helicopter drop by definition, period.

    The simplest way is to just have an across the board drop in sales or payroll tax (without any corresponding drop in spending elsewhere) – the change in deficit would be monetized. Specifically having the central bank/government deliberately choosing which assets to buy (this includes QE) is far far more anti – Hayakian and susceptible to information problem than a simple broad tax cut.

  19. Gravatar of Britonomist Britonomist
    20. February 2016 at 10:36

    ‘Under monetarism, everybody gets “the money”.’

    So monetarists must really hate QE then – remind me who are the ‘benefactors’ of QE again?

  20. Gravatar of jknarr jknarr
    20. February 2016 at 11:09

    Brit, I totally agree with you above. Debt is the symptom of insufficient base money. Where you see debt expansion, there is monetary tightness. By definition , easing is deleveraging.

    Hate? Benefit? Who cares, sounds ideological. Economist readers are not ignorant, just deeply misinformed. Un-educating misinformation is harder than teaching to ignorance. Worry about reality rather than ideology or consistency.

  21. Gravatar of E. Harding E. Harding
    20. February 2016 at 11:11

    @Benoit Essiambre

    -Not a good idea for Ray Lopez. But it might be a good idea for Gary Anderson and the Crusher of Pussy.

  22. Gravatar of Major.Freedom Major.Freedom
    20. February 2016 at 11:37

    jknarr:

    “Debt is the symptom of insufficient base money. Where you see debt expansion, there is monetary tightness. By definition , easing is deleveraging.”

    Can there be a statement more wrong than this? The truth is exactly the opposite in every way.

    Continuous debt expansion REQUIRES a continuously expanding monetary base. The veyr purpose of central banking is to allow banks to inflate, I.e. expand credit, in unison so that the chances of one bank being relatively eoverexpanded compared to the others is reduced. Banks that want to keep expanding credit require a continuously expanding supply of money on hand to facilitate interbank and customer transfers/withdrawals.

    To claim that debt expansion takes place on the basis of tight money is to say that the expansion of fires takes place on the basis of a removal of that which fuels the fire.

    Where you see credit expansion, you see expansion of the monetary base.

  23. Gravatar of TravisV TravisV
    20. February 2016 at 11:49

    Apparently the “debt supercycle” concept is increasingly popular, Rogoff and Ray Dalio are promoting it…….

    http://www.voxeu.org/article/debt-supercycle-not-secular-stagnation#

  24. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 11:54

    Don Geddis, you really are a shit-for-brains. The CB increases the monetary base, not the supply as such. *That’s* determined by the willingness of banks to lend and borrowers to borrow. Is it too much to ask you clowns to understand basic mechanics of the banking system? You don’t need to be an MMT’er to believe that some details matter a bit.

  25. Gravatar of marcus nunes marcus nunes
    20. February 2016 at 12:07

    Central Banks are fast loosing credibility. The Economist doesn´t want to be left behind!

  26. Gravatar of Major.Freedom Major.Freedom
    20. February 2016 at 12:08

    Shmebulock,

    The bank’s “willingness to lend” is not independent of the central bank’s actual increasing of the monetary base.

    MMT is intellectual poison.

  27. Gravatar of E. Harding E. Harding
    20. February 2016 at 12:37

    Perhaps the least credible major central bank has been Draghi’s ECB. Then the Fed, then the Japanese central bank, then the Bank of England.

  28. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 13:48

    Hey Major Dumbass, MMT wasn’t the point.

  29. Gravatar of Alexander Hamilton Alexander Hamilton
    20. February 2016 at 14:12

    There are a number of sure signs you’re dealing with a braindead MMTer. Among them: 1) Regurgitating the claim that central banks do not actually print banknotes. 2) Claiming a monopoly on knowledge of “basic mechanics of the banking system” 3) A total lack of awareness or knowledge of any monetary system other than the United States.

    You can see all three at work in the asinine dribblings of our new village idiot Schmebulock. You can see him confidently proclaim that the treasury prints money not the central bank. While sort of true in the US he is totally unaware that most central banks are in fact responsible for the printing of banknotes and more often than not employ a private printing company (De La Rue) to do it for them.

    Of course we all know that “printing money” is an often used turn of phrase meaning the creation of base money. But MMTers seem to take great pride in trying to trip people up on semantics.

  30. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 14:30

    Wow, another MM ass-hat joins the fray, apparently lacking reading ability. I explicitly disavowed MMT, I simply noted that some mechanics are important to keep sight of, otherwise you wind up making idiotic statements (i.e. over and above the usual MM idiocy). It’s like the frequent MM gnashing of teeth and wailing over IOER, believing it’s a disincentive to bank lending. Utterly clueless.

  31. Gravatar of Alexander Hamilton Alexander Hamilton
    20. February 2016 at 14:35

    If it quacks like a duck

  32. Gravatar of Joe Joe
    20. February 2016 at 14:46

    Major.Freedom, good point on credit tightness leading to debt contraction. But looking at it another way (and TravisV’s debt super cycle article is interesting here), monetary tightness causes us to have taken out too much debt. It’s a broken promise by the central bank. For example, if I expect my income to grow at 5% per year, I’ll take out a $400,000 mortgage. If all of a sudden those expected increases don’t materialize, I either default, or I ratchet down my spending because I’ve borrowed based on conditions that no longer exist.

    I think a lot of Italians (or even Americans brought up on stories of 70’s inflation) fell into the trap of, wow, look at those low interest rates. And eventually there will be a big inflation like in the past, so bring on more debt! But without the expected rising incomes to help us all adjust to our debt level (or if there’s deflation, and we’re really screwed), we all need to borrow a lot less and save a lot more.

  33. Gravatar of Joe Joe
    20. February 2016 at 14:49

    In my own personal situation, the type of saving I want to do even changes. My family invests a portion of savings every month. But with the news as it is, I’m much more likely to put that extra cash in an emergency fund, or pay down my mortgage more quickly. And it doesn’t take a time lag for me to make those decisions.

  34. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 14:59

    Oh BTW Ham-boy, I claim no “monopoly” on the mechanics of banking. Indeed, anyone who is the least bit interested can freely go to the Fed’s own webpage and see for themselves. But of course intellectual curiosity is about the last term I would use to describe MM’ers. The intellectual equivalents of a dirty sanchez is more like it.

    http://www.urbandictionary.com/define.php?term=Dirty+Sanchez

  35. Gravatar of CA CA
    20. February 2016 at 15:26

    Shmebulock is the coolest dude in his dorm.

  36. Gravatar of Scott Sumner Scott Sumner
    20. February 2016 at 15:32

    Crusher, I love it when adolescent jerks don’t know enough to even disagree with the post, and just throw out an unrelated comment, thinking its relevant. Not only are your darts not hitting the target, they’re not even aimed at the right wall.

    AD, It’s moronic because it has a high opportunity cost, the future distortionary taxes that must be raised to service the debt created.

    Britonomist, I never said Greece did a helicopter drop, I said they ran up excessive debt. Do you disagree?

    Peter, Yes, interest is counted as profit.

  37. Gravatar of ssumner ssumner
    20. February 2016 at 15:45

    Ken, Not sure what happened there, but hopefully it will make other people less paranoid when their comments are held up for inexplicable reasons.

    I just don’t see how helicopter drops solve anything. Japan tried it and it didn’t work. Then they shifted to a 2% inflation target, and it worked a little bit. Why not buy stocks and bonds? Worst case you get no inflation, and own the entire world. The opportunity cost of helicopter drops is not having a sovereign wealth fund.

  38. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 16:05

    @CA

    Yes, I am.

  39. Gravatar of Alexander Hamilton Alexander Hamilton
    20. February 2016 at 16:07

    Schmebulock demonstrating that the trolls just keep getting progressively worse. He’s a more puerile version of Ray and is unable to offer any substantive arguments

  40. Gravatar of cma cma
    20. February 2016 at 16:29

    Don’t recognize the new created money for heli drops as debt. Debt wont increase as a result. Money is just a good, it doesn’t need to be debt. I the govt has good projects it can simply tax/borrow no need for a wealth fund. Taxation is more accountable than just printing and handing to gov.

  41. Gravatar of jknarr jknarr
    20. February 2016 at 17:03

    MF, I hear you, but let’s get causality right. When an economy is starved of aggregate demand (NGDP) in the present, it intermediates from the future, i.e. Debt. When a company cannot fund internally, it borrows. Debt appears now, while the nominal income appears later (maybe). If future income fails to appear, borrow more. Income starvation (tight money) produces higher leverage, smaller equity cushions, income becomes scarce and more valuable in aggregate (yields fall).

    Tight money is immensely profitable for banks. Yield hunting leads to all sorts of financial engineering, while the fees from debt creation are very lucrative. It’s bubblicious for the markets, until the tight money debt leverage train hits the default risk wall.

    When the default crisis hits, the Fed enters with base expansion, lowers rates, allows debt to roll over, refinance, and expand again. This base expansion into overleverage is pre-immunized: the new capital collateral is already claimed by the preexisting debt, and is generally noninflationary.

    When an economy is starved of NGDP, people borrow. The Fed bails out the overleverage post hoc.

  42. Gravatar of Ray Lopez Ray Lopez
    20. February 2016 at 18:52

    @Alexander Hamilton – I agree with you, and FYI the way “new money” is created by the Fed (working with Treasury) is ’round trips’ when buying/selling government paper, via interest on said paper. The interest is “new money” in circulation (I’m not talking about the multiplier effect of base money being relent here, but ‘new money’ not existing in the system; also I acknowledge during recessions and funks like now there’s plenty of existing, old, money waiting to be lent out, that’s another point).

    At zero interest on government paper, no ‘new money’ (as above defined) is being created. What’s interesting to me is whether Sumner believes this is optimal, that is, is it OK for the Fed just “print money” without asking for collateral (old money = collateral)? Why should the Fed need collateral before giving out cash to member banks (that’s the question; I know the answer I just want Sumner’s take)? That is, why not just have the Fed (or better, the Treasury) ‘print money’ and spend it to achieve some NGDP target? Paging Dr. Sumner…

    @Ken Duda- you’re not welcome here anymore. Your money is already spent and you can forget your inflationist agenda…get lost, vamos!

  43. Gravatar of Shmebulock, Crusher of Pussy Shmebulock, Crusher of Pussy
    20. February 2016 at 19:30

    I have this image of Ray Lopez as some fat, hairy dude, chicken-hawking in the Philippines.

  44. Gravatar of Ray Lopez Ray Lopez
    20. February 2016 at 21:23

    @Shmebulock, Crusher of Pussy – OT – you are obsessed with sex and make too many homophobic references. That usually means…you are gay. BTW, gay in southeast Asia is so common (some people say 10-20% of men here are gay; compare to 3-10% in the USA) that nobody cares. It’s like complaining about the rainy weather in Seattle. But in the sexually repressed USA, people like Shmebulock feel they have to conform to the social norms and come across as overly-macho chauvinists, sadly.

  45. Gravatar of Major.Freedom Major.Freedom
    20. February 2016 at 22:31

    jknarr:

    “MF, I hear you, but let’s get causality right. When an economy is starved of aggregate demand (NGDP) in the present, it intermediates from the future, i.e. Debt.”

    No, that is not a consequence of a desire for more money. With lower inflation of the base, there is no incentive nor mechanism for a banker to think “gosh, with the money we have on hand growing only modestly, suddenly I have an urge to extend evr more quantities or credit until I feel better about NGDP.”

    First, bankers have an incentive to lend more when they have or are expected to have more money on hand with which to facilitate withdrawals and transfers.

    Second, if anything, should NGDP not grow as fast, this constrains available profitable credit expansion.

    Third, debt is a two sided event. If there is a higher desire for money holding, credit expansion is not only not the solution, but isn’t even regarded as a solution.

    “When a company cannot fund internally, it borrows.”

    No,a company borrows more, all else equal, when it is expected to have able to profitably invest it, which means they expect rising demand for their output.

    “Debt appears now, while the nominal income appears later (maybe). If future income fails to appear, borrow more. Income starvation (tight money) produces higher leverage, smaller equity cushions, income becomes scarce and more valuable in aggregate (yields fall).”

    You have the causation reversed. When profits fall, there is an incentive to lend less, not more. You are talking as if credit expansion is solely a one sided affair.

    “Tight money is immensely profitable for banks.”

    It is the exact opposite. Loose money is immensely profitable for banks. Tighter money reduces the profitability of banks. Banks earn money through lending. They lend more when they have more reserves on hand.

    “Yield hunting leads to all sorts of financial engineering, while the fees from debt creation are very lucrative. It’s bubblicious for the markets, until the tight money debt leverage train hits the default risk wall.”

    Financial engineering cannot explode unless there is an explosion in the nominal demand for such securities.

    The explosion in complex structured products was the result of inflation. Inflation does not increase the demand for everything equally. It can blow up the demands for particular goods, services, or securities.

    “When the default crisis hits, the Fed enters with base expansion, lowers rates, allows debt to roll over, refinance, and expand again.”

    Crisis? You mean the crisis that occurs after the Fed slows down its inflation.

    “This base expansion into overleverage is pre-immunized: the new capital collateral is already claimed by the preexisting debt, and is generally noninflationary.”

    That money is not merely hoarded. It must be invested profitably or less the borrowing exacerbates the defaulting.

    “When an economy is starved of NGDP, people borrow. The Fed bails out the overleverage post hoc.”

    No, when the Fed is expansionary banks expand credit. You are conflating money transfers between non-inflating parties, with credit expanding out of thin air, which occurs on the basis of a higher base.

  46. Gravatar of Major.Freedom Major.Freedom
    20. February 2016 at 22:33

    Shmebulock,

    You brought up MMT. And your point was false.

  47. Gravatar of Postkey Postkey
    21. February 2016 at 01:35

    “Here is a graph of the difference between cumulative tax revenue and cumulative federal spending in the US since 1789. The US started to run fiscal deficits systematically in 1931 and since then has run deficits 85 per cent of the time. Every time they had tried to run surpluses a recession has followed.
    Note the gap widens after the early 1970s, which of course is when the Bretton Woods system of convertible currencies and fixed exchange rates was abandoned and the US government adopted a fiat currency system.
    It seems that public spending is not paid for by taxes over a long period of time. Funny about that!”

    http://bilbo.economicoutlook.net/blog/?p=29761#more-29761

  48. Gravatar of Postkey Postkey
    21. February 2016 at 01:38

    The U.K.Treasury are considering the ‘magic money tree’ option?

    “3.34 In theory, central banks could go beyond the range of unconventional instruments deployed by central banks in advanced economies since the 2008-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money.36
    In theory, this could allow governments to increase spending or reduce taxation without raising corresponding financing from the private sector. Adair Turner, Chairman of the Financial Services Authority, has suggested this could be a tool to use in extreme circumstances.” P 54.
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/221567/ukecon_mon_policy_framework.pdf

  49. Gravatar of Peter Peter
    21. February 2016 at 05:22

    Scott: “Yes, interest is counted as profit.”

    So the central bank has a kind of sovereign wealth fund. They buy bonds for newly created money and all profits go to the government for spending. And it’s also be a bit like a helicopter drop, only it’s done through normal government spending.

  50. Gravatar of Negation of Ideology Negation of Ideology
    21. February 2016 at 05:32

    Ken –

    “As you know, I wonder about softening the MM position here, so we can align with the Economist/Keynesian narrative rather than fight it endlessly.”

    I don’t want to fight Keynesians endlessly(or even temporarily), but isn’t this a solution searching for a problem? Treasuries held by the public are about 13 Trillion. Treasury backed debt (GSEs, student loan, etc.) are something like $5T. The Fed could buy up the $3T in state and local bonds and secure it against future Federal aid.

    That’s $21 Trillion the monetary base can get to without risking one penny of future taxpayer dollars or suffering any opportunity costs of additional spending. When we get close to that barrier, we can start talking about the relative merits of sovereign wealth funds or tax holidays.

    But I doubt it’ll ever happen. If it ever did, I’d argue for tax cuts that bring in more revenue later, like increasing IRA deduction limits or accelerating depreciation.

  51. Gravatar of ssumner ssumner
    21. February 2016 at 06:47

    Alexander, Yes, Ray is a jerk with a sense of humor, while crusher even lacks that. I’d have to agree that he’s a new low in trolls.

    Peter, But you don’t accumulate assets when you do helicopter drops.

    Negation, I’ve said before that I’m fine with the Fed doing helicopter drops if it runs out of ammo. But running out of ammo means the Fed owns the entire global stock of wealth. Not likely.

  52. Gravatar of Zhanna Zhanna
    21. February 2016 at 06:51

    Professor; I was curious about your comments on a sovereign wealth funds. I confess that I was not entirely sure of the precise definition of a SWF aside from its intuitive meaning.
    Question: Do you consider the United States Social Security Trust to be a sovereign wealth fund?
    And an aside – Can a SWF be funded by liabilities?

  53. Gravatar of ssumner ssumner
    21. February 2016 at 07:05

    Zhanna, I don’t know if there is a precise definition, but I see the SS trust fund as simply a reduction in the debt, whereas SWFs usually invest in assets other than that government’s debt.

    But I suppose it could be considered a SWF if you wanted to make that claim.

  54. Gravatar of Randomize Randomize
    22. February 2016 at 09:10

    The Social Security trust is the US’s version of a sovereign wealth fund. Come to think of it, printing money to pump up the social security trust wouldn’t be the worst idea in the world.

    Money would be printed and deposited in the trust.
    The trust would take the money and buy bonds.
    Social security recipients would get their benefits and their COLAs would come back while the rest of us would see the benefits of the asset purchases.
    Everybody wins.

  55. Gravatar of Rick weldon Rick weldon
    22. February 2016 at 10:39

    I dropped my subscription to the economist over 8 years ago when the gushed endlessly over Barack Obama like little schoolgirls.

  56. Gravatar of Charlie Jamieson Charlie Jamieson
    22. February 2016 at 13:15

    Money is not tight because credit expansion continues merrily along. The trouble is the debt/money is largely being used to finance asset purchases and not economically helpful activity such as consumer spending or government spending.
    The central bank doesn’t have the mechanism to do ‘helicopter drops’ without creating more debt.
    If it wanted to directly put deposits in our private accounts or the governments account it would to expand its balance sheet or create some new kind of money.

  57. Gravatar of ssumner ssumner
    22. February 2016 at 14:58

    Randomize, You said:

    “Come to think of it, printing money to pump up the social security trust wouldn’t be the worst idea in the world.”

    No, just the second worst. The worst is voting for Trump.

    Rick, That’s a mistake, it’s still the best magazine out there.

  58. Gravatar of Cliff Cliff
    22. February 2016 at 21:11

    Charlie,

    For every asset buyer, there is a seller, right?

  59. Gravatar of Christian List Christian List
    23. February 2016 at 03:25

    @Brian Donohue

    “The stupidest current idea floating around is that when the Fed prints money and buys a bond in the open market, the entity that sells that particular bond to the Fed has some kind of first mover advantage.”

    Well everyday people might not get all the technicalities right (which is understandable) but they sometimes feel (and smell) when something is fishy.

    For example 20 bank institutions have way better access to the Fed than all the other banks. Only those so-called “primary dealers” are allowed to sell bonds to the Fed. So only those banks can collect the fees. QE was pretty big so we are talking about hundreds of millions dollars in fees here. I think Goldman Sachs was #1 in making this easy money while JP Morgan was #2.

  60. Gravatar of Postkey Postkey
    23. February 2016 at 04:04

    “The trouble is the debt/money is largely being used to finance asset purchases and not economically helpful activity such as consumer spending or government spending.”

    Prof. R. A. Werner believes that there is ‘productive’ and ‘unproductive’ credit.

    “Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power – something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”
    http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

  61. Gravatar of collin collin
    23. February 2016 at 05:51

    Two Questions:

    1) What if there is nothing that can make inflation have consistent gradual increase on a global scale? After 25 years, it is hard to say if Japan only tried harder for inflation at this point. In reality there is lots of inflation in Russia, Brazil, and Valenzuela so increasing inflation can be done. I bet Saudia Arabia reaches 5% during 2016. Even India is over 5% at this time and has a consistent 3 – 6% for several years.

    2) Is the US doing the right strategy? Core inflation is closing in on 2%+ and only food and oil are keeping the headline number down.

  62. Gravatar of Willy2 Willy2
    25. February 2016 at 09:43

    Nope. Wrong again.
    – The FED follows what happens to what short term rates and those short term rates rose. So, the FED followed.

  63. Gravatar of ssumner ssumner
    25. February 2016 at 13:09

    Collin, I don’t understand your question.

  64. Gravatar of Jack’s Links – The Zeitgeist Log Jack’s Links – The Zeitgeist Log
    28. February 2016 at 23:41

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    […] but just can’t get the numbers to work, who jokingly refers to his preferred policies as debasing the currency, and who proposes a single-payer health care system for catastrophic medical expenses…calls […]

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