Why not both?

Later this afternoon, I will have a post over at Econlog, explaining why monetizing the US debt would quickly lead to hyperinflation.  In the meantime, the Brookings Institute plans to do a conference on negative IOR.  (Of course they didn’t invite the guy who invented the concept, and successfully predicted its impact on asset prices.)

Here’s the description of the conference:

In just one reminder of the extraordinary moment in economic history in which we are living, the central banks of the eurozone, as well as Japan, Switzerland, Denmark, and Sweden, have pushed their lending rates below zero — banks actually have to pay a fee to deposit money at the central bank. In some major countries, Germany and Japan among them, investors pay a fee to lend to the government instead of collecting interest. Once a fantasy of a few academic economists, negative interest rates are now seen as a tool available to monetary policymakers at times of very low inflation. But they remain controversial: are negative rates a prudent and potent response to today’s lackluster economy? Or do they squeeze bank profits and hurt lending, confuse investors and consumers, and smack of desperation?  (Emphasis added)

Why not both?  And why not both for QE as well?

And why do economists keep putting the cart before the horse?  First you need a credible policy target.  Then you figure out the best tools.  A strategy that relies on the tools to create credibility is likely to produce both the good and the bad effects described above.

In contrast, a promise to do “whatever it takes” to achieve 4% NGDPLT would not require negative IOR, and would require very little QE.  Central banks are so shy that they end up making things really hard for themselves, by trying to take the “easy way out”.  (I’m actually a bit sympathetic, as that describes my adolescence.)

HT:  Patrick Horan

PS.  Just joking about being “not invited”—I believe it’s open to those who register.



19 Responses to “Why not both?”

  1. Gravatar of marcus nunes marcus nunes
    12. May 2016 at 10:36

    Scott: “First you need a credible policy target.” This idea seems so simple…

  2. Gravatar of Steven Kopits Steven Kopits
    12. May 2016 at 10:49

    We can actually take a crack at the impact of monetizing the debt and inflation.

    In Argentina under Kirchner, the Central Bank was contributing unsterilized new money to the government budget on the order of 4.5% of GDP. This was associated with approximately 30% annual inflation.

    So figure, if you wanted 3% incremental inflation, monetizing 0.5% of GDP should do the trick. In the US, figure $80-100 bn of monetization should get you 3% inflation, based very crudely on the Argentine experience.

    See more on slides 4 and 12.

  3. Gravatar of E. Harding E. Harding
    12. May 2016 at 15:22

    Scott, I’m a bit saddened you didn’t give any empirical examples in your hyperinflation monster post. You’re usually pretty good at this stuff.

    I still doubt there’s a hyperinflation monster.

    Thanks, Steven.

  4. Gravatar of Benjamin Cole Benjamin Cole
    12. May 2016 at 15:29

    Interesting post and I eagerly await the forthcoming posts.

    If helicopter drops ( Ben Bernanke Style MFFP) are so potent, why not use first, in small doses? Why tweetybird around with relatively impotent tools?

    Japan is doing QE and negative interest. Should they not send in the choppers?

    David Beckworth says the Fed’s QE to date and the additions to its balance sheet should be permanent, and that should be public policy. This is not debt monetization?

    And egads, sheesh and gadzooks, who would be happy with a 4% increase in NGDPLT? Can we shoot for some boom times instead?

  5. Gravatar of Benjamin Cole Benjamin Cole
    12. May 2016 at 15:44

    Send in the tweetybirds…or the whirlybirds?

  6. Gravatar of E. Harding E. Harding
    12. May 2016 at 16:01

    What would happen if the Fed just declared all its various QEs to have been permanent formal monetizations of the debt, and abolished interest on reserves as well?

  7. Gravatar of Major.Freedom Major.Freedom
    12. May 2016 at 16:52

    Every time the Fed engages in an open market operation in Treasury bills, the Fed is “monetizing debt”.

    Just because the member banks are making a cut from this operation, it doesn’t change that fact.

  8. Gravatar of Gary Anderson Gary Anderson
    12. May 2016 at 17:08

    There is a massive scarcity of bonds. So, bond yields will go negative with a lot more QE. Interest on excess reserves is another matter, but wouldn’t Eric Lonergan’s views about helicopter money, real, debt free, helicopter money, be the right position?

  9. Gravatar of Market Fiscalist Market Fiscalist
    12. May 2016 at 17:46

    Given the current huge monetary base isn’t a bigger issue for the future going to be debtifying the money to reverse the monetizing of the debt that has been going these last few years ??

  10. Gravatar of Benjamin Cole Benjamin Cole
    12. May 2016 at 19:34

    Viscount Takahashi Korekiyo (高橋 是清?, 27 July 1854 – 26 February 1936) was a Japanese politician who served as a member of the House of Peers, as the 20th Prime Minister of Japan from 13 November 1921 to 12 June 1922, and as the head of the Bank of Japan and Ministry of Finance.

    Takahashi made many contributions to Japan’s development during the early 20th century, including introducing its first patent system and securing foreign financing for the Russo-Japanese War. Following the onset of the Great Depression, he introduced controversial financial policies which included abandoning the gold standard, lowering interest rates, and using the Bank of Japan to finance deficit spending by the central government.


    By most accounts, Korekiyo was successful with his helicopter drops, or money-financed fiscal programs (MFFP).

    The problem was, after being successful, he wanted to cut the chopper drops, but the imperial Japanese military had him assassinated, so they could keep the money presses financing their expansionism. This led to inflation eventually. (Lesson: keep the military on a very tight leash).

    This is a fascinating episode in history, and a example of a successful use of MFFP. This seems to be a forgotten episode in history.

    Lord Adair Turner (wish I had a name like that) suggests chopper drops as first resort. Why not? If there some sort of Taylor Rule-type implementation, it would work. That is, chopper-drop only when inflation is below 4% and unemployment above 4%.

    Or, in connection with NGDPLT, my favorite.

    in Japan, in the US, and in Europe we have been tweety-birding around with QE and negative IOR.

    Can we get serious?

  11. Gravatar of Derivs Derivs
    12. May 2016 at 20:01

    “I still doubt there’s a hyperinflation monster.”

    So if the U.S. moved unilaterally, where would you make your first market tomorrow morning to trade Dollars for Euros, if suddenly there were an extra 19+ trillion USD floating around out there???

    It would be fun to watch.

  12. Gravatar of Gabe Gabe
    13. May 2016 at 06:02

    “a promise to do “whatever it takes” to achieve 4% NGDPLT ”

    So could monetizing a undefined portion of the federal debt be considered “whatever it takes”? if so then Sumner sounds a llot like Trump to my admittedly ignorant ears.

  13. Gravatar of ssumner ssumner
    13. May 2016 at 07:18

    Steve, You’d get much more inflation than 3%. Here’s the right way. Assume currency demand is 6% of GDP at 3% inflation. Then assume NGDP growth is 4% or 5%, at that inflation rate. Then the amount of debt you’d monetize in the steady state is 4% or 5% of 6% of GDP, or about $40 to $50 billion per year.

    Harding, OK, here’s my empirical example—Zimbabwe.

    Why do you disagree with my post? Which assumption is wrong?

    You asked:

    “What would happen if the Fed just declared all its various QEs to have been permanent formal monetizations of the debt, and abolished interest on reserves as well?”

    The price level would quickly jump 3 fold.

    Market, Yes, they may debtify some of the previous QE. Is it “an issue”?

    Gabe, My position is nothing like Trump’s. But first you’d have to explain what Trumps’ position is, before I could explain why. Is it his “default on the debt” position? Or his “monetize the debt” position? I’m not calling for either.

  14. Gravatar of Steven Kopits Steven Kopits
    13. May 2016 at 07:36

    Scott –

    I’m not sure I understand what you’re saying, but then again, I’m not sure I understood what I was saying either.

    But either way, we now have a specific monetary value to use in stimulating inflation.

    So if you want a bit of inflation, you’d recommend monetizing debt on the order of 0.25% of GDP. My number comes out at 0.5% of GDP.

    If we were advising Japan, and wanted a bit of inflation (do we want a bit of inflation?), then we might recommend monetizing 0.25% of the public debt and seeing how it goes, no? That’s also a monetary tool.

  15. Gravatar of Steven Kopits Steven Kopits
    13. May 2016 at 07:36

    …monetizing debt equal to 0.25% of GDP…

  16. Gravatar of E. Harding E. Harding
    13. May 2016 at 10:12

    Zimbabwe isn’t a good example because it had an enormous increase in the money supply followed by an enormous increase in the price level. I’m looking for some example that had a modest increase in the money supply as a result of debt monetization and had a far greater increase in NGDP.

  17. Gravatar of Oderus Urungus Oderus Urungus
    14. May 2016 at 08:09

    So, basically your advice to the Fed is to “do whatever it takes”? Wow, that’s really helpful. I don’t suppose you can elaborate?

  18. Gravatar of JP Koning JP Koning
    14. May 2016 at 08:11

    Scott, I’d argue that the reason you didn’t get invited (whereas fellow econblogger Miles Kimball did) is because you only wrote about negative interest rates in 2009ish and then restarted in 2015 whereas Miles has been consistently hammering away since 2011 or so on the topic. Speaking of which, I’d be interested to read a point-by-point blog post from you on Kimball’s variable peg between cash and deposits. Let’s say the Bank of Japan implemented the proposal on Monday. What would you have to say?

  19. Gravatar of ssumner ssumner
    14. May 2016 at 17:41

    Steven, You said:

    “If we were advising Japan, and wanted a bit of inflation (do we want a bit of inflation?), then we might recommend monetizing 0.25% of the public debt and seeing how it goes, no?”

    There is no reason to believe that would work at zero rates.

    JP, I was actually sort of joking—Miles is a much better fit for the conference than I am. I’m not really much of a fan of negative IOR, I just think it’s better than nothing. Miles is also a better economist, knows the technical side of the field, which is so important today.

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