Bernanke on helicopter money
Ben Bernanke has done a series of posts on what central banks can do at the zero bound. His first post looked at negative IOR, and the second examined targeting long-term interest rates. Of course Bernanke has also advocated the use of QE. Now he looks at the helicopter drop option. Bernanke agrees with my view that helicopter money should be used as a last resort. Where we may differ slightly is how many options need to be tried before reaching that point.
In my view, it’s too soon to jump to helicopter money, just because the techniques mentioned by Bernanke have been exhausted. I recall Bernanke once arguing that the inflation target might have to be raised if there was a danger of hitting the zero bound, but he doesn’t mention that here. In my view there are many alternatives that we’d need to run through before considering helicopter drops, such as a higher inflation target, or price level targeting, or better yet NGDPLT. I’d also want to go beyond T-bond purchases, to the purchase of other assets. Thus creation of a sovereign wealth fund would be far superior to helicopter drops.
For some reason Bernanke doesn’t consider those alternatives, perhaps because he doesn’t think they would be needed:
In this post, I consider the merits of helicopter money as a (presumably last-resort) strategy for policymakers. I make two points. First, in theory at least, helicopter money could prove a valuable tool. In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high. However, second, as a practical matter, the use of helicopter money would involve some difficult issues of implementation. These include (1) the need to integrate the approach with standard monetary policy frameworks and (2) the challenge of achieving the necessary coordination between fiscal and monetary policymakers, without compromising central bank independence or long-run fiscal discipline. I propose some tentative solutions for these problems.
To be clear, the probability of so-called helicopter money being used in the United States in the foreseeable future seems extremely low. (emphasis added)
Almost everyone agrees that the US is likely to hit the zero bound in the next recession. So obviously Bernanke doesn’t think being at the zero bound, in and of itself, calls for helicopter drops. But then what would be the trigger? On that issue he’s a bit vague.
Suppose we assume that “extremely low” means “1% chance”. My response would be that we could lower than number to something closer to one in a million by adopting a different policy target, and giving the Fed the responsibility to “buy whatever it takes” to keep as close to the target as possible. Then helicopter drops could be used as a fallback to make the “Chuck Norris effect” credible, without ever actually having to use the policy.
To his credit, Bernanke sees the problems with the helicopter drop theory—it doesn’t really solve any fundamental problem. Even a helicopter drop may not be effective if the money supply increase is not viewed as permanent. This causes Bernanke to suggest exotic extensions of the traditional helicopter drop:
As I’ve stressed, MFFPs [money financed fiscal policies] differ from ordinary fiscal programs by being money-financed rather than debt-financed. In my illustrative fiscal program, government spending and tax cuts are paid for by the creation of $100 billion in new money. To have its full effect, the increase in the money supply must be perceived as permanent by the public.
In practice, however, most central banks do not make monetary policy by choosing a fixed amount of money in circulation. Instead they set a target for a short-term interest rate (in the U.S., the federal funds rate) and allow the money supply to adjust as necessary to be consistent with that target. The rationale for this approach is that the relationship between interest rates and the economy appears more stable and predictable than that between the money supply and the economy. If central banks target interest rates rather than the money supply itself, than it’s not immediately obvious how the idea of a “permanent increase in the money supply” can be made operational.
One possible solution for that problem is that the central bank, rather than making an explicit promise about the money supply, could temporarily raise its target for inflation—equivalently, it could increase its target for the price level at each future date. Since the price level and the money supply tend to be proportional in the longer run, aiming for a higher price level could approximate the effects of committing to a higher money supply. A shortcoming of this approach is that it obscures the fact that the fiscal package is being financed by money creation rather than by new debt—a distinction that, again, the public must appreciate if the MFFP is to be fully effective.
This is not just a theoretical possibility. We know that helicopter drops failed in Japan, because the monetary injections were viewed as temporary. Bernanke correctly notes that shifting to a level target for prices can overcome this problem. But then level targeting also overcomes the main weakness of QE. Thus if we do what Bernanke suggests, we don’t even need the fiscal component.
The methods that central banks use to meet their interest-rate targets pose further complications. Before the financial crisis, the Fed continuously varied the amount of money in the system (more precisely, the quantity of bank reserves) to keep the funds rate near the desired level. In the years since the crisis, however, several rounds of quantitative easing have resulted in very high levels of bank reserves, to the extent that the traditional method of making marginal changes to the supply of reserves is no longer effective in controlling the federal funds rate. Instead, following practices similar to those of other major central banks, the Fed currently influences the funds rate by varying the interest rate it pays on bank reserves and on other short-term investments at the Fed. [8]
As my former Fed colleague Narayana Kocherlakota has pointed out, the fact that the Fed (and other central banks) routinely pay interest on reserves has implications for the implementation and potential effectiveness of helicopter money. A key presumption of MFFPs is that the financing of fiscal programs through money creation implies lower future tax burdens than financing through debt issuance. In the longer run and in more-normal circumstances, this is certainly true: The cost to the Treasury of spending increases or tax cuts – and thus the future tax burden – will be lower if the Fed provides the financing. In particular, when the Fed’s balance sheet has shrunk and reserves are scarce again, the Fed will be able to manage short-term rates without paying interest on reserves (as it did traditionally), or in any event by paying a lower rate on reserves than the Treasury must pay on government debt. In the near term, however, money creation would not reduce the government’s financing costs appreciably, since the interest rate the Fed pays on bank reserves is close to the rate on Treasury bills.
Both interest-rate targeting and the payment of interest on reserves make it more difficult to achieve and communicate the cost savings associated with money financing. Here is a possible solution. Suppose, continuing our example, that the Fed creates $100 billion in new money to finance the Congress’s fiscal programs. As the Treasury spends the money, it flows into the banking system, resulting in $100 billion in new bank reserves. On current arrangements, the Fed would have to pay interest on those new reserves; the increase in the Fed’s payments would be $100 billion times the interest rate on bank reserves paid by the Fed (IOR). As Kocherlakota pointed out, if IOR is close to the rate on Treasury bills, there would be little or no immediate cost saving associated with money creation, relative to debt issuance.
However, let’s imagine that, when the MFFP is announced, the Fed also levies a new, permanent charge on banks—not based on reserves held, but on something else, like total liabilities—sufficient to reclaim the extra interest payments associated with the extra $100 billion in reserves. In other words, the increase in interest paid by the Fed, $100 billion * IOR, is just offset by the new levy, leaving net payments to banks unchanged. (The aggregate levy would remain at $100 billion * IOR in subsequent periods, adjusting with changes in IOR.) Although the net income of banks would be unchanged, this device would make explicit and immediate the cheaper financing of the fiscal program associated with money creation.
Or we could just raise the inflation target to 3%.
Or even keep it at 2% and do level targeting. Or NGDPLT. All these epicycles to make helicopter drops work make me dizzy. The simple truth is that monetary policy is all we need if used intelligently, and if not used intelligently (as in Japan pre-2013), even helicopter drops won’t get the job done. So let’s K.I.S.S., and work out fallbacks that don’t require wildly unrealistic assumptions about cooperation between the Fed and a GOP-controlled Congress. Instead let’s simply shift the target slightly (4% NGDPLT anyone?), and perhaps add to the securities that the Fed is eligible to buy.
I am more sympathetic to Olivier Blanchard’s view of helicopter drops:
One thing he is not worried about is running out of monetary ammunition. “There is an argument that QE actually becomes more effective, the more you use it,” he said.
As a central bank buys more bonds, the more it has to pay to convince the last hold-outs to sell their holdings. “The effect on the price plausibly becomes stronger and stronger,” he said.
Prof Blanchard said the authorities should stick to plain vanilla QE rather than experimenting with “exotic stuff”.
He waved aside talk of ‘helicopter money’ with contempt, calling it nothing more than a fiscal expansion by other means. It makes little difference whether spending is paid for with money or bonds when interest rates are zero.
Blanchard favors a 4% inflation target, so that central banks would not hit the zero bound. Again, K.I.S.S.
HT: Benn Steil, James Alexander, et al.
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14. April 2016 at 05:52
Although it may be hard to achieve a proper helicopter drop, it’s pretty easy to have the correct long-term effect: cut taxes! Tax cuts are far more difficult to reverse than any kind of short-term effect.
All you need to do is make sure that:
(1) The tax cuts are expected to be “paid for” by future inflation rather than future tax increases or spending cuts.
(2) The central bank is committed to a reasonable target; I think it would work well whether it was a 2% inflation target or a 5% NGDP target.
14. April 2016 at 05:55
Fortunately, there’s good reasons to think that Congress would have a rather hard time actually trying to lower spending or raise taxes, so it seems to me that this kind of long-term commitment to an increased deficit would be credible.
14. April 2016 at 06:03
It seems quite perverse to me that you, as a libertarian, would prefer a sovereign wealth fund over lower taxes.
Both taxes and sovereign wealth funds distort the economy, wouldn’t it be better to reduce both?
14. April 2016 at 06:39
Then helicopter drops could be used as a fallback to make the “Chuck Norris effect” credible, without ever actually having to use the policy.
Nothing against economist here but I really tired of the “Chuck Norris effect” here because it is wrong analogy. As I read the Chuck Norris effect is that Central Bankers are so effective that even without taking all necessary policy measures that they can get the desired results. That is the opposite of Chuck Norris “cinema?” because why would anybody watch a Chuck Norris movie where he doesn’t kick somebodies ass? He is not a good ‘actor’ nor are his movies worth watching otherwise. You watch them to say the one area Chuck Norris excelled at which is kick some ass with some decent fight choreography. (Sorry I am more of a Jackie Chan movie fan myself and found Chuck Norris movies boring.)
This would be better related to ‘Val Lewton’ horror movies in the 1940s. With such small budgets they could not afford good ‘monster costumes so they alluded to the ‘Monster Horrors’ (and the dangers of female sexuality.)
14. April 2016 at 07:10
You need a fully fleshed out, legal and well publicized mechanism to allow for helicopter drops – even if it’s an extreme last resort measure. It’s similar to having a nuclear arsenal – at times people might have doubted the conventional military power & infrastructure of say the USSR, but thanks to them having thousands of nuclear missiles, they never would risk any kind of direct military engagement regardless.
Likewise, having a helicopter drop as the nuclear option when all else fails will ensure the markets never doubt (fairly or otherwise) that policymakers are without ammunition in the face of a substantial potential fall in the markets. Some market practitioners might in fact not be intimidated by Chuck Norris alone – his threats might not be so powerful – but if he’s holding a grenade launcher (helicopter drop), you can be sure his threats become credible.
14. April 2016 at 07:39
I don’t understand why everyone makes this so complicated.
1. Monetary policy works to increase AD by causing a marginal increase in the exchange of financial assets for goods and services by the non-financial sector. Monetary policy causes this in two ways: a) raising expectations of future NGDP and/or b) buying financial assets to raise their price relative to goods and services
2. The debate about fiscal policy is irrelevant. As long as the non-financial sector (including the government) increases its marginal spending it doesn’t matter whether it’s the Federal government issuing bonds to build roads, consumers running up their credit card balances to eat out at restaurants, or businesses drawing down credit lines to build factories.
3. Asset exchanges within the financial sector have no impact on the economy. If the Fed exchanges Treasuries for excess reserves with Chase, it’s no different than if the NY Fed did this trade with the St. Louis Fed. It has no effect and is irrelevant to monetary policy.
4. The zero bound is a red herring. Until I can get a 100 year bullet no interest mortgage, we’re not at the zero bound.
5. Even if there were a zero bound problem (i.e. the non-financial sector exchanges financial assets for cash and holds the cash rather than spending it), there are plenty of ways around the problem including a) the Fed buying assets which necessitate actual spending (e.g. new car/home loans, construction loans, etc.), b) the Fed charging annual interest to banks on the net amount of Fed Funds exchanged for cash, or c) implementing electronic money with negative rates of interest.
14. April 2016 at 07:52
dtoh,
Fiscal policy does matter, and it matters for straightforward accounting reasons. Only the Treasury can actually “print” money, while the Fed cannot.
Money is a liability on the central bank’s balance sheet, and thus in order to achieve a steady growth in the money supply over time the central bank must also accumulate assets.
Thus, if what you want is steady growth in the money supply over time, your central bank must necessarily *accumulate* assets forever and not just temporarily borrow them. Now, that’s perfectly OK if the asset in question is government debt (although that leads to unfounded concern about monetizing the debt). However, the Fed’s ability to accumulate government debt is constrained by *fiscal* policy, which is why fiscal policy matters.
You’re correct to argue that buying private-sector assets can avoid this issue, but for this to work the central bank has to not only borrow them (which I’m OK with) but also accumulate them over time, and this is *backdoor fiscal policy*.
This kind of backdoor fiscal policy is politically infeasible, and for good reason.
14. April 2016 at 08:26
Dimitri, I keep seeing people say that only the treasury can print money? What gives you that impression? Are you basing this on the fact the Federal Reserve employs a department that is part of the treasury to print it’s banknotes? If so it’s a mistake to get hung up on this fact. Most central banks can and do “print” money.
14. April 2016 at 08:35
Nope, it’s not about the physicality of the “printing press”, it’s about the underlying process. When a central bank does what you refer to as “printing money”, it’s just swapping one government liability (money) for another government liability (bonds). This *does* have an effect on public demand, but it does this by shifting some consumption that was being offset by the ability to hold bonds from the future into the present. Thus the Fed cannot create inflation in the long run, it can only induce some amount of inflation now in exchange for less inflation later.
On the other hand, the Treasury *can* print money by crediting people’s accounts. Sure, they’re required to offset this by buying bonds, but then the Fed is permitted to purchase and hold those bonds anyway, because managing the quantity of those bonds is part of the Fed’s job.
Fundamentally, the Treasury *prints* money-like things, whereas the Fed simply swaps some kinds of money-like things with other kinds of money-like things.
14. April 2016 at 08:36
In particular, I find this to be a weak argument of Bernanke’s:
>> One possible solution for that problem is that the central bank, rather than making an explicit promise about the money supply, could temporarily raise its target for inflation—equivalently, it could increase its target for the price level at each future date.
These two approaches are emphatically *not* equivalent. If a central bank has an inflation target, then the implied future price-level is highly correlated with present-period errors in achieving the inflation target. That is, if the central bank misses the inflation target by 1% in the present year, all future price levels would be expected to be 1% lower.
In contrast, a price level target of any stripe makes the expected future price level invariant with respect to near-term errors.
This is a more stable approach, since we already know the central bank can’t raise its inflation target “temporarily.” Central banks target medium-term inflation precisely because they believe their policy tools do not adequately constrain short-term inflation.
This error is even worse in the context of emergency measures like helicopter drops. If the central bank is already at the point where it is persistently failing to meet its inflation target, how will a promise to change that missed target “temporarily” increase its credibility?
14. April 2016 at 08:39
Bankrupt U Bernanke – stupid as always.
“The rationale for this approach is that the relationship between interest rates and the economy appears more stable and predictable than that between the money supply and the economy.”
Rates-of-change, Roc’s, in money flows, M*Vt = roc’s in PT (in Professor Irving Fisher’s truistic “equation of exchange”). Nothing’s changed in over 100 years. Monetary lags are not “long and variable”, they are mathematical constants. Targeting N-gDp simply caps R-gDp (i.e., our incomes). Economists apparently don’t know my Gospel.
14. April 2016 at 08:46
MFFPs is just another name for debt monetization (and in this case blatant “green backing”).
The U.S. Treasury’s “overdraft privilege” was revoked for good reason. The Treasury-Reserve Accord of March 1951 is prima facie evidence.
This brings the “Scorpion and the Frog” fable to mind. Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.
And that’s too bad as MMT could eliminate debt’s “bogeyman” – the compounding of interest expense.
But privatizing the commercial banks could effectively eliminate: the need for bank capital, legal reserves, the payment of interest on reserves, etc. It would lower the cost of capital and increase the ROI for the non-banks.
14. April 2016 at 08:46
Ah I see. I’ve never really bought the idea that money is a government liability.
14. April 2016 at 08:57
Alexander,
The government has the power to tax you (an asset of sorts), and money is a government liability in that the government guarantees it will accept that money as payment for its taxes. In any case, money-as-government-liability is exactly how the Fed’s balance sheet works, whether you think it makes conceptual sense or not.
Regardless, it’s not really any different to say that money/bonds are a government liability than to say they’re a private-sector asset, but they’re *very different* to all other private-sector assets in that they don’t have corresponding private-sector liabilities.
Taken from another perspective, “money” and “bonds” are conceptually very similar to two different kinds of accounts at the Fed, one of which pays interest while the other does not.
14. April 2016 at 09:02
In any case, the basic argument I’m making doesn’t depend at all on whether you want to call things “assets” or “liabilities”.
The core point is that long-term NGDP growth requires the Fed to accumulate assets, and I’m only OK with that if the asset in question is government bonds. The alternative people keep suggesting, which is to have the Fed accumulate private-sector assets over time, is bad economics and bad public policy.
14. April 2016 at 09:04
The Fed could buy “student debt”.
14. April 2016 at 09:09
I’m in favour of government management of student debt, but that’s something that ought to be decided by Congress, not by the Fed.
14. April 2016 at 09:18
I think forcing the Fed to directly finance the deficit is a really good idea, but NGDP level targeting would be even better. So why not try both simultaneously?
14. April 2016 at 09:25
I support NGDP level targeting, but my point is that in the long run it’s doomed to failure without better fiscal policy.
Right now, inflation is low because the market is taking governments’ commitments to balanced budgets quite seriously, whereas NGDP level targeting requires a long-run commitment to sufficiently large structural deficits.
14. April 2016 at 09:42
Scott, I have to say I get a little confused about the difference between helicopter drops and QE. When Bernanke discusses MFPP he says
“the Treasury could issue $100 billion in debt, which the Fed agrees to purchase and hold indefinitely, rebating any interest received to the Treasury.”
The comparison with QE would be that the Treasury issues $100bn that the banks buy and then the Fed agrees to purchase. So the money in helicopter drop goes directly to the government to be spent, while it goes to the banks to be lent first in QE. As Bernanke notes, in the MFPP approach, the money would get spent first and then end up the in banks, where presumably it should have the same effect as the original QE purchases. So presumably, the benefit is that it is spent once first? Is that right?
14. April 2016 at 09:54
Bernanke mentions in these 3 posts that if a recession hits the US economy again, the FED should lower interest rates to zero. Then it should adopt Forward Guidance and QE. But he says that the authorities should also experiment with Negative Interest Rates and target long term interest rates in case they are reluctant to adopt QE again or in combination with QE. He specifically writes in the first post:
“The Fed employed QE from late 2008 until October 2014, and the policy helped support the U.S. recovery and reduce the risk of price deflation. Other major central banks are using it now. But the FOMC might be reluctant to turn to it again. It’s hard to calibrate, and communicating about it is difficult (as we learned in 2013 when Fed talk about ending QE led to a “taper tantrum” in financial markets). It’s also possible that a new round might be less helpful than before.
For these reasons, before undertaking new QE, the Fed might want to consider other options. ”
So I think he would seem reluctant to use QE again in another recession.
It is also really strange that he doesnt mention currency depreciation, a higher inflation target and level targeting. Of course he mentions the higher infation target but only in combination with MFFP.
14. April 2016 at 10:02
He also mentions correctly that “Peoples QE” is propably illegal in most juristictions but i think he doesnt mention that MFFP is also currently illegal because the FED can only buy government debt in the open market and also it cannot credit printed money to the Treasurys checking account!
14. April 2016 at 10:25
@Dimitri Klimenko
-Inflation wasn’t all that high in Greece during its depression, either (though it was positive).
14. April 2016 at 10:26
Dimitri, I’m all for tax cuts, if we cut spending. I don’t like tax cuts that lead to budget deficits.
Collin, I love those old Val Lewton films. Especially “Cat People”
dtoh, I mostly agree.
Dimitri, You said:
“Only the Treasury can actually “print” money, while the Fed cannot. ”
This may be true in a literal sense, but metaphorically speaking only the central bank can print money.
Majromax, Good point.
John, My understanding is that QE differs from helicopter drops in that QE does not cause any additional Treasury bonds to be issued, and helicopter drops do.
Thanos, Good points. What I found strange is that he mentions a higher inflation target (but only temporary) as a way to exit a liquidity trp, but not as a way to prevent it.
Currency depreciation for the US is tough, for diplomatic reasons. I mean explicit depreciation, obviously QE caused some depreciation.
14. April 2016 at 10:44
Scott, You said:
“I’m all for tax cuts, if we cut spending. I don’t like tax cuts that lead to budget deficits.”
Suppress the urge to think “but hyperinflation!” and consider a hypothetical economy where there is no central bank and the government does all of its spending by printing money directly.
Under the obvious QTM prediction, as long as that government has a relatively stable deficit as a % of GDP, this will mean long-term stable growth in the quantity of money, and thus of NGDP.
Is this good policy? No, because government spending is not something that gives you a fine level of control.
It does, however, make one point very clear: in that other world, there is *nothing wrong with deficits*, because they’re just a way to create money and get desirable long-run NGDP growth.
Scott, You said:
“This may be true in a literal sense, but metaphorically speaking only the central bank can print money.”
You’re operating on the wrong metaphor. Money is just another kind of government liability, and the central bank cannot create government liabilities, only swap them around.
The world we live in is not that different to the “magical” other world I was just talking about, except that there is one key difference: whenever the government prints money (by spending it), it offsets that spending by going to the free market and trading some of that money for another kind of money that pays interest, and thus encourages some people to defer some of their consumption.
You need to get over your fear of deficits. Government debt is fundamentally different to private debt! The basic danger of excessive government debt is that it results in too much future money (and thus inflation), but our current situation is the *opposite* of that.
14. April 2016 at 10:53
In the simplest terms possible:
A government deficit is also a private-sector surplus in the amount of money-like things (cash / bonds).
If you want long-term NGDP growth, you cannot achieve this without a long-term average surplus of money-like things!
14. April 2016 at 10:54
Scott, you have me convinced helicopter money isn’t necessary to meet monetary goals if we provide better guidance via a superior target. Because of the history of inflation-targeting, do you think price-level targeting might be an easier sell than NGDPLT? Do you think its effectiveness is “close enough”?
Regarding the mechanism, I’m not convinced asset purchases aren’t a massive handout to incumbent asset-holders. Would you countenance pairing the SWF with an asset tax and/or having SWF returns paid out as equal dividends to all citizens? Or do you have any other ideas that might ameliorate the distributional issue? Thanks.
14. April 2016 at 11:45
” -Inflation wasn’t all that high in Greece during its depression, either (though it was positive)”
Actually inflation in Greece is negative.
14. April 2016 at 12:07
Can please someone explain to me if some version of MFFP is currently legal??
14. April 2016 at 13:02
Did Japan do helicopter drops (as in a money-financed fiscal expansion)? Or were they bond-financed? I agree it doesn’t make much difference as far as effectiveness is concerned. Either way, the central bank needs to promise to accommodate higher nominal spending.
14. April 2016 at 13:44
“It does, however, make one point very clear: in that other world, there is *nothing wrong with deficits*, because they’re just a way to create money and get desirable long-run NGDP growth.”
Dmitri,
To me the optimal seems to be if the private sector is lowering savings at the same time gov’t deficit stays stable. But that still leaves the guess work on what the trend of private sector is?? I also have to wonder (I have put very little thought to this), since you are really just stating an accounting truism and clearly there is an inverse relationship between the 2 (assuming closed system). Do you think that private sector can force a deficit by saving, but maybe the gov’t can’t do the opposite? That the gov’t is always the tail to the private sectors rather fickle and variable appetite for risk on their balance sheet (as you said, private sector balance sheet preference is an important issue)
14. April 2016 at 14:19
The BOJ currently owns roughly 1/3 of all JGBs, and is buying them roughly as fast as (or maybe faster than?) the Japanese government issues them. It’s also buying private assets, but with the intent of selling them back over a few years. It’s also buying stuff from exchange-traded funds, although it has announced its intent to sell them off over a number of years.
Whether or not it counts as a “helicopter drop” depends on whether you think Japan has introduced additional and unexpected deficit spending, or has simply continued on its previous course of reducing deficits.
In that sense, Japan has committed to some spending programs that would probably count as a “helicopter drop”, but the problem is that Shinzo Abe has also committed to raising taxes, which probably has the net effect of making things worse (depending on what exactly is being stimulated and what is being taxed, and by how much).
14. April 2016 at 14:27
Derivs,
You are correct; since it’s an accounting truism the causation flows in both directions. The “automatic stabilizers” are a pretty obvious example of this, in which private-sector impacts affect the net government balance.
However, unless either
(1) The political will isn’t there (e.g. rich / old people don’t want inflation)
(2) The government loses its legitimacy and thus its power to tax and spend
a government has plenty of power to set long-term trends in the budget balance.
The short term, by contrast, is very difficult to control, and that’s why central banks can have an important role to play.
Were I to design a system from scratch, I’d definitely have the government do all of its spending by directly crediting bank accounts, and get rid of the (silly) requirement to match the amount of its deficit with an equivalent amount of bonds.
Instead, issuance of bonds in appropriate quantities and of appropriate maturities ought to be completely at the discretion of the central bank.
14. April 2016 at 15:14
Scott
“Dimitri, I’m all for tax cuts, if we cut spending. I don’t like tax cuts that lead to budget deficits.”
I guess Im a bleeding heart liberal I associate tax cuts as a large windfall to the wealthiest americans and spending cuts to programs that benefit the poor. Is that accurate to you? If so, I wonder how ppl who support that view sleep at night
14. April 2016 at 15:19
I can’t figure out why BB is so focused on controlling bank reserves and seems like he felt compelled to pay IOR. Can someone explain that to me? Hasn’t paying IOR reduced the impact of the QE’s to date? Thx.
14. April 2016 at 15:58
‘Hasn’t paying IOR reduced the impact of the QE’s to date?’
In fact that was Bernanke’s intention: To sterilize the reserves, he said so under oath.
Meanwhile, Venezuela seems to have nuclear powered helicopters;
http://www.bloomberg.com/news/articles/2016-01-22/imf-sees-venezuela-inflation-rocketing-to-720-percent-in-2016
‘Venezuela’s consumer inflation, already the world’s highest, will more than double this year to a level above all estimates from economists surveyed by Bloomberg, the International Monetary Fund said.
‘Inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner.’
14. April 2016 at 16:11
The difference between 0% IOR and 0.5% IOR is not really a particularly big deal. The interest rates are comparatively low either way, and unless you make a significant change to them it’s pretty hard to change NGDP that way.
If the Fed switches to negative IOR, it might have some (very slight) inflationary impact in the shorter term, but in the medium term it actually means *less* inflation because it’s equivalent to the Fed effectively taxing money out of the economy.
14. April 2016 at 16:15
I wish my liabilities required me to pay 0% interest and never redeem them.
14. April 2016 at 16:24
Patrick,
Thanks. I remember reading that to in Courage to Act. I just can’t comprehend why BB would want to do both. It’s like driving a car and stepping on the brakes and gas at the same time. What is the benefit of sterilized QE?
14. April 2016 at 16:24
It is typical that Bernanke and Sumner are slyly redefining “helicopter drops” to mean something completely different from what Milton Friedman meant by the term.
Friedman defined a helicopter drop as follows:
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
Now contrast that with Bernanke’s interpretation of Friedman’s definition:
“In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic—a broad-based tax cut combined with money creation by the central bank to finance the cut. Milton Friedman had dubbed the approach a ‘helicopter drop’ of money.”
Notice the difference? If you can’t, then I’ll bold the key words:
Friedman:
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”
Bernanke:
“In a discussion of hypothetical possibilities for combating deflation I mentioned an extreme tactic—a broad-based tax cut combined with money creation by the central bank to finance the cut. Milton Friedman had dubbed the approach a ‘helicopter drop’ of money.”
Friedman had in mind the scenario of newly printed money being given for nothing to all individuals on the streets.
Bernanke is talking about the central bank giving money for nothing to the government Treasury.
Not only is the Cantillon Effect significantly different between the two scenarios, but what Bernanke is describing is actually what the central bank already does. During “normal” “monetary policy”, what happens?
1. The treasury borrows money from the banks.
2. The banks are given bond claims in return.
3. The central bank buys the bonds from the banks with newly printed money.
4. The treasury pays the central bank interest and finally the principal on those bonds.
5. The central bank remits the interest and principal payments right back to the treasury.
This process is an effective giving of free newly printed money to the treasury. It would be like you borrowing money from a bank, then the central bank prints money to buy the bond from the bank, then the interest and principal you pay the central bank, is remitted right back to you by that same central bank.
The net result is a Bernanke helicopter drop of money on your specific house and nobody else’s.
If instead there was a Friedman helicopter drop, then what would happen is that the helicopter would drop money not only on your house, but all your neighbor’s houses as well.
Bernanke is rather clueless, or he’s lying. He once pleaded that the central bank does not print money. This colloquial expression as everyone who uses the term knows is not a literal description, but an expression that describes the central bank issuing new money out of nothing, meaning unbacked by anything valuable. This the central does everyday, and there was Bernanke denying it by pretending the criticism is a literal one.
14. April 2016 at 16:25
Fascinating blogging, as was Bernanke’s post. Top-flight stuff.
I do wonder that if the Fed conducts QE and ppermanently boosts its balance sheet while the federal government is running a deficit, if that is not really a helicopter drop. It has rotors and hovers like a chopper….
I like helicopter drops provided they are mated to tax cuts to people who will spend the money. Helicopter drops? Hey, send in the B-52s.
I must say I think the entire monetary macroeconomics profession has become a little bit fussy. A lot of fretting about 1% or 2% moves in inflation and what not. I think some totally anal Teutonic analyst deep in the bowels of the Bank of International Settlements is controlling the entire profession.
Dudes, bring out the heavy artillery and let it rip.
The world has plenty of resources, plenty of labor, plenty of capital, incredible ongoing innovation and trade across borders has never been easier.
The goal should be Full Tilt Boogie Boom Times in Fat City.
14. April 2016 at 16:27
Patrick, I just remembered something. The Fed started paying IOR first. So what was their logic when they started doing QE1 when they could have simply lowered IOR back to zero first?
14. April 2016 at 16:27
Scott, you said, “My understanding is that QE differs from helicopter drops in that QE does not cause any additional Treasury bonds to be issued, and helicopter drops do.”
This isn’t quite right. For advocates of helicopter drops, the whole point is to avoid issuing Treasury bonds. Instead, the central bank credits the Treasury with new reserves, and the gov’t spends those reserves. Unlike QE, the central bank does not receive assets in exchange for the reserves it issues; alternatively, the central bank books something like negative equity on its balance sheet.
For some critics of helicopter money, like Kocherlakota, there’s no effective difference between financing gov’t spending with bonds or reserves. I think Kocherlakota is right. If rates are zero, then short term bonds are near perfect substitutes for reserves. But even if short term rates are positive, then the central bank MUST pay a positive rate of IOR (otherwise, rates will fall to zero given the excess reserves created by the helicopter drop). The amount paid to IOR reduces the profits turned over to Treasury from the central bank, increasing the fiscal deficit by the same amount as if Treasury was paying interest on bonds directly.
The upshot is that helicopter money and debt-financed spending impose an equal future tax burden. QE, on the other hand, basically imposes a current “tax” on the private sector. While the new reserves injected are expansionary, the assets added to the central bank’s balance sheet siphon interest income away from the private sector and turn that income over to the Treasury, reducing current deficits, but also reducing aggregate demand.
14. April 2016 at 17:01
Bill,
Buying bonds while paying IOR ought to result in somewhat higher NGDP growth (or interest rates / inflation, if you will) in the medium-term without too much of it showing up in the shorter-term.
It appears that’s exactly what Bernanke wanted to achieve, so I guess he should get some points for that.
14. April 2016 at 18:22
Scott,
I was surprised you quoted Blanchard. I read the article as being very pessimistic about sovereign debt. For while Japan is heading to the cliff they are only special because they will be first to drive over it.
The notion that Japan might spin out of control ought to raise doubt that a central bank can never run out of options. On the contrary I see the central bank as facing the “Gambler’s Ruin” problem. The government’s fiscal and regulatory policies set the win probability. In the short term monetary policy can shift probability > .5. But in the long term, as fiscal and regulatory policy continue to weigh on the economy the win probability drops below .5, no matter the monetary policy. When this happens the long term result will be economic ruin.
Monetary policy is not the cause of ruin but belief in its omnipotence enables fiscal and regulatory policy errors to persist until the economy is ruined.
http://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-GR.pdf
14. April 2016 at 21:50
From Vich:
Scott, you said, “My understanding is that QE differs from helicopter drops in that QE does not cause any additional Treasury bonds to be issued, and helicopter drops do.”
I wondered about this sentence too.
BTW, Sumner’s idea that nations build sovereign wealth funds through QE-money creation is really thought-provoking.
It seems the Swiss could have bought enough global bonds to “live on the interest.” Perhaps buy a few trillion in bonds, collect the interest, and cut taxes accordingly.
The US could do this too.
As long as QE does not cause inflation above target, what is wrong with this?
15. April 2016 at 00:26
“I’d also want to go beyond T-bond purchases, to the purchase of other assets. ”
Just to clarify, you are suggesting the Fed to buy assets, i.e. commodities or stocks.
If they buy stocks, this means the State becomes the owner of the companies. This means the nationalization of companies, right? Those companies will then be ran by the government?
And if the Fed buys commodities, still the State is becoming the owner of stuff which was previously owned by privates. To me, this looks like expanding the government and reducing the private sector.
Have I misunderstood something?
15. April 2016 at 05:14
Dimitri, We are talking past each other. I have nothing against the existence of deficits or a national debt, I have no “excessive fear” of deficits. I thought you were advocating increases in these variables. They are already plenty large, no further increase is needed, indeed they should be smaller.
You said:
“You’re operating on the wrong metaphor. Money is just another kind of government liability, and the central bank cannot create government liabilities, only swap them around.”
Obviously that’s not true, otherwise central banks would not be able to target inflation at 2%. And if that were true then monetary policy should have little effect on asset prices, but it has a huge impact.
myb6, You asked:
“Regarding the mechanism, I’m not convinced asset purchases aren’t a massive handout to incumbent asset-holders.”
This is not true. Injecting money affects assets prices in roughly the same way regardless of whether it’s injected by buying assets or by paying public employees with the new money. Check out my posts on Cantillon effects.
I’m not sure whether price level targeting is more politically feasible. It would certainly help avoid the zero bound issue, but it’s not as good as NGDPLT.
Just to be clear, I do not support SWFs, I just mentioned that as a hypothetical. So I haven’t even bothered to consider the details of that proposal—why waste time on something that’s a one in a million proposition? (Not one in a million happening, but one in a million that it would be needed.)
I do not see any important distributional issues with monetary policy. Good policy helps the rich and poor, and bad policy hurts both groups. So let’s have good policy.
Rajat, They combined huge budget deficits with huge increases in the monetary base. That’s what most economists mean by helicopter drops.
Dimitri, Japan was doing helicopter drops years ago, when it was still seeing falling NGDP. Don’t just focus on the recent modest reduction in the deficits, look at the 1990s and 2000s.
James, You said:
“I guess Im a bleeding heart liberal I associate tax cuts as a large windfall to the wealthiest americans and spending cuts to programs that benefit the poor. Is that accurate to you?”
I wouldn’t call you a liberal, I’d call you uninformed. There are all kinds of tax cuts, including Bush’s equal rebate to everyone. Spending mostly goes to relatively well off federal workers, or the medical industrial complex, or a trillion dollars on useless jet fighters. The “poor” just get crumbs. So no, I do not think of fiscal policy the way that you do.
Also, what makes you think corporate tax cuts don’t favor the poor? Do you think the person who writes the check to the government actually pays the tax?
Bill, You are correct.
Dimitri, You said:
“The difference between 0% IOR and 0.5% IOR is not really a particularly big deal.”
This is totally wrong. The level of interest rates tell us nothing about the stance of monetary policy. In 2011 the ECB tightened enough to drive the eurozone into a double dip recession, and interest rates rose by “only” 0.5%.
15. April 2016 at 05:26
Vich, So is the lack of central bank assets just a way to make it harder for the central bank to later reverse its policy? I doubt that would work. It runs up against political realities.
But let’s say I am wrong. You can get the same effect by simply having the Fed donate T-bonds to the Treasury, with no added fiscal stimulus. The fiscal aspect adds nothing, it’s all about making monetary stimulus credible.
Dan, I’ve consistently been pessimistic about Japan’s fiscal situation, which is why I’ve advocated monetary stimulus.
Ben, It’s hard to “live on the interest” when the interest is negative.
Maurizio, You said:
“Just to clarify, you are suggesting the Fed to buy assets, i.e. commodities or stocks.
If they buy stocks, this means the State becomes the owner of the companies. This means the nationalization of companies, right? Those companies will then be ran by the government?”
No, no, no, and no.
I’m not suggesting they buy stocks unless needed, and it almost certainly won’t be needed.
If it were needed, I’d have them buy index funds, in which case they’d have no control over companies. But it’s one of the angel’s on the head of a pin deals, purely hypothetical.
15. April 2016 at 06:31
I’m uninformed on many things. (although some of your readers think I came up with the business cycle). Anyways, our federal government is a giant insurance company with an army. Spending mostly goes to medicare, medicaid, social security, and the military. In order to fill in the gap left by tax cuts there’s risk the spending cuts will come from our insurance programs….programs that largely benefit middle/lower-income americans. There’s def room to cut in the military which I would favor to an extent
“Also, what makes you think corporate tax cuts don’t favor the poor? Do you think the person who writes the check to the government actually pays the tax?”
So obviously there’s different kinds of tax cuts. yes corporate tax cuts would prob help the poor to an extent. But lets be honest these taxes would be a huge boost to shareholders i.e wealthier Americans. Compared to tax cuts spending on infrastructure would have a more direct benefit to poorer americans.
This is where ppl say “but productivity!” “Efficiency” “bigger pie for all!” and other simple slogans
15. April 2016 at 06:50
Interesting details on Japan in today’s WSJ;
http://www.wsj.com/articles/japans-negative-rate-experiment-is-floundering-1460644639
———–quote———-
Japanese financial institutions have been searching overseas for higher returns, without a corresponding rise in investment at home. Japanese investors bought a total of ¥5.47 trillion ($50 billion) worth of foreign securities in March, up 11% from February, according to the finance ministry.
In turn, the amount foreign financial institutions can charge to lend greenbacks to Japanese investors has surged. The premium for a three-month contract to exchange yen for dollars is now at ¥0.298, almost twice what it was a year ago.
Foreign investors have been recycling the yen they get back into Japanese government bonds, traders say, even though yields on a range of these bonds have turned negative in recent weeks—meaning investors who buy them end up paying money to Japan’s government. But the fee foreign institutions can charge to lend dollars is now so high that it outweighs the cost of holding negative-yield-bearing bonds, which remain the safest place for investors to park their yen.
The upshot: an unusual bout of foreign interest in Japan’s government bonds, an often sleepy market where overseas investors have generally held under 10% of outstanding bonds. Net foreign buying of medium-term Japanese government bonds was double the 12-month average in February, the most recent month for which data are available.
————endquote———-
15. April 2016 at 08:16
“Ben, It’s hard to “live on the interest” when the interest is negative.”
It may be hard to live on the interest, however,
“Negative Rates: How One Swiss Bank Learned to Live in a Subzero World
When Alternative Bank Schweiz moved to charge depositors, it actually gained account holders”
http://www.wsj.com/articles/negative-rates-how-one-swiss-bank-learned-to-live-in-a-subzero-world-1460547973?cb=logged0.990130082736687
15. April 2016 at 08:39
“Live on the interest”.
Okay the Swiss National Bank can’t buy bonds, if no bonds pay interest. But corporates do pay interest. They could buy dividend stocks or commercial properties, and the citizens could live on the rent or dividends.
15. April 2016 at 10:16
Scott, you asked, “is the lack of central bank assets just a way to make it harder for the central bank to later reverse its policy? I doubt that would work. It runs up against political realities.”
Although no advocate of HM would put in this way, I think you’re right. The CB would hold fewer marketable assets to sell, and would need a bailout from Treasury if the CB attempted to shrink its balance sheet or raise IOR by too much. This makes the increase in the monetary base from HM appear more permanent than by QE. I called the accounting negative equity, but Adair Turner calls it a “due from government receivable.” Either way, Treasury is on the hook and that would give the Rand Pauls and Ted Cruzes lots of ammo to end the Fed (i.e. political no-go).
You also said, “You can get the same effect by simply having the Fed donate T-bonds to the Treasury, with no added fiscal stimulus. The fiscal aspect adds nothing, it’s all about making monetary stimulus credible”.
Such a move would be identical to QE. Right now, in the aftermath of QE, the Fed holds the T-bonds, but turns around and pays the Treasury all of the profit it accrues from interest on them. It’s the left pocket paying the right pocket, which pays back the left pocket. Donating the T-bonds to Treasury wouldn’t change anything (the money would just stay in the left pocket the entire time). But again, the Fed swapping reserves for T-bonds functions as a tax on the private sector. The income that would otherwise flow into the private sector, instead flows back to Treasury (or would never leave Treasury if the Fed donated its T-bonds).
From your perspective the fiscal stimulus adds nothing, for others it’s doing all the work. It adds wealth (new reserves or new T-bonds), without the offsetting “tax”. The method of finance is irrelevant. It may require a future tax, but only if the fiscal spending works and interest rates need go up to slow growth.
15. April 2016 at 15:04
Scott, You said:
“Dimitri, We are talking past each other. I have nothing against the existence of deficits or a national debt, I have no “excessive fear” of deficits. I thought you were advocating increases in these variables. They are already plenty large, no further increase is needed, indeed they should be smaller.”
As I see it, the issue is one of expectations, i.e. not so much how large deficits are now, but how large (or how small) the market expects future deficits to be. I think a major issue right now is that many governments are trying quite hard to reduce their deficits, with some being crazy enough that they’re even trying to reach *surpluses*.
Scott, You said:
“Obviously that’s not true, otherwise central banks would not be able to target inflation at 2%. And if that were true then monetary policy should have little effect on asset prices, but it has a huge impact.”
I’m not positing that central banks can’t do anything; if that was what I thought I’d argue that they be abolished and governments do *all* their spending with money rather than bonds. I do think monetary policy has an impact, but I’m disagreeing with you about *how* it has an impact.
15. April 2016 at 19:31
Draghi is buying more bonds, and it will insure negative interest rates given the demand for those bonds as collateral in derivatives trades. So, unless something else is bought we are headed toward negative bond rates with more QE. That is far worse than negative IOR. Negative IOR could be a good thing, but negative bond rates is a BAD IDEA.
15. April 2016 at 19:49
The US built a Victory Fund for funding WW2 through bond purchases by companies and by individuals. Why not a sovereign wealth fund for infrastructure funded the same way. It would be a patriotic endeavor, or even have the Fed fund the projects interest free with base money to be taken back later with no added interest, like Bernanke says. (The banks won’t like it.)
16. April 2016 at 02:34
“Don’t Trust Ben Bernanke On Helicopter Money”
‘ Here’s where Bernanke passes from the practical nuts and bolts to the fantasy world of mainstream economics. According to Ben, the Helicopter flies, so to speak, because it causes “a temporary increase in expected inflation,” and because it “does not increase future tax burdens.” ‘
http://www.forbes.com/sites/stevekeen/2016/04/12/dont-trust-ben-bernanke-on-helicopter-money/#87bcbce2f6c3
16. April 2016 at 06:45
James, You said:
“Compared to tax cuts spending on infrastructure would have a more direct benefit to poorer americans.”
You mean like high speed rail in California?
Patrick, And what makes them think the negative rates caused the yen appreciation? The yen fell sharply on the news that the BOJ was adopting negative IOR.
Vich, You said:
“From your perspective the fiscal stimulus adds nothing, for others it’s doing all the work. ”
I find that sort of comment to be annoying. It’s not enough to say from some “perspective”, you need good arguments. I’ve told you why fiscal adds nothing to a credible monetary policy, now you tell me what’s wrong with my argument. I don’t care what people think fiscal can do, I want to know why monetary alone can’t do exactly the same.
Dimitri, Many countries should be running surpluses right now, if they plan to use countercyclical fiscal policy in the next recession. The Keynesians keep telling us that it’s the change in the deficit that matters.
As far as “impact”, can we agree that central banks have enough impact so that they can single-handedly target inflation at 2% for decades, even as the Congress is ruled over by incompetent clowns?
16. April 2016 at 13:48
Scott, You said:
“As far as “impact”, can we agree that central banks have enough impact so that they can single-handedly target inflation at 2% for decades, even as the Congress is ruled over by incompetent clowns?”
That depends on how exactly you define “single-handedly”. My view is that pure monetary policy does indeed have significant impact in the short run, and this does serve to explain the relative success central banks have had.
However, at a fundamental level, monetary policy and fiscal policy are intertwined, and cannot be studied in isolation; this has been known for a long time and dates back (at least) to Sargent and Wallace’s “unpleasant monetarist arithmetic”.
My argument is that the actual underlying mechanism by which central banks affect inflation in the longer-term is, to a significant extent, tied to fiscal policy. I’m saying that the reason “tight money” decreases long-term inflation is that it serves as a signal to Congress, who despite their incompetence are nonetheless unwilling to ignore the market and simply pay exorbitant interest rates on their debt, and thus will inevitably respond by increasing taxes or cutting expenditure in the medium term.
My argument is that despite valiant attempts at “loose money” by current central banks, the public currently understands that that signal simply isn’t working on Congress, who are most definitely *not* likely to significantly cut taxes or raise expenditures in the near term. Thus, the current malaise is, at its root, caused by a failure of monetary-fiscal coordination; it is currently failing to work in the same way (or at least to the same extent) that it usually does.
The underlying cause of the “zero lower bound” malaise is that public discourse has a fundamental asymmetry; many people (and, as a consequence, Congress) worry quite a lot about having *too much* debt/money, but they worry much too little about the possibility of having too little debt/money. This asymmetry means that, in the medium term, central banks are quite good at keeping inflation from getting too high, but can have a lot of difficulty at keeping it from getting *too low*.
Bernanke’s “helicopter money” would in fact be a way to solve that coordination problem, but it’s not a good way to solve that problem. The best way is to fix the public discourse about deficits and debt.
16. April 2016 at 17:47
Dimitri, You said:
“However, at a fundamental level, monetary policy and fiscal policy are intertwined, and cannot be studied in isolation;”
Yes, they are related. But they can and are studied in isolation. All you need is a regime where the central bank is the driver and the fiscal authority has to accommodate itself to their decisions. And that’s what we have.
You said:
“despite valiant attempts at “loose money””
What valiant attempts? The ECB wasn’t even at the zero bound from 2008-12. The BOJ didn’t even set a 2% inflation target until 2013. And when the BOJ did so, inflation promptly began rising. The ECB is hopeless split between hawks and doves, so it’s too soon to say what will happen there. The Fed just raised rates. Tell me how raising interest rates is “valiantly attempting” to boost inflation?
16. April 2016 at 18:35
Scott, you said:
“Yes, they are related. But they can and are studied in isolation. All you need is a regime where the central bank is the driver and the fiscal authority has to accommodate itself to their decisions. And that’s what we have.”
Merely saying that isn’t going to convince anyone, especially when the whole point of my argument is precisely that current problems are due to the fiscal authority failing to accommodate the way it’s “supposed” to.
As for the “valiant attempts”, QE is an example of that, and Japan’s is probably the best example. The BOJ is currently engaged in a massive QE program with no end in sight, and yet Japan still has inflation that is pretty close to zero, and negative nominal yields on 10-year bonds.
16. April 2016 at 19:45
[…] a recent post criticizing the mental gymnastics Bernanke engages in regarding helicopter money, Scott […]
16. April 2016 at 23:52
“I don’t care what people think fiscal can do, I want to know why monetary alone can’t do exactly the same.”
“Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand.”
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/4/#6e38191ef9f8