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Koichi Hamada believes that the benefits of so-called helicopter money are not worth the risks

Koichi Hamada believes that the benefits of so-called helicopter money are not worth the risks

By Koichi Hamada*

The world economy is struggling. The single currency is fettering, not freeing, the eurozone; Japan is smarting from the slowdown of America’s normalization of monetary policy; and emerging markets worldwide are suffering the consequences of China’s economic mismanagement. But adverse global conditions, however troubling, should not lead central bankers to neglect the risks of untested policies – above all the “helicopter drops” that many are now proposing.

Conceived in 1969 by Milton Friedman as part of a thought experiment – not an actual proposal – helicopter drops got their name from the fantastic vision of fresh money being scattered from a helicopter whirring overheard. But the point of helicopter drops – or what former US Fed Chair Ben Bernanke recently called a “money-financed fiscal program” (MFFP) – is simply to distribute newly printed cash directly to consumers, such as through tax rebates.

Over the last half-century, central bankers have repeatedly ruled out the use of MFFP. But in the current environment of persistently weak aggregate demand, below-target inflation, and slow or no output growth, economists worldwide have been desperately seeking deus ex machina – a search that, for some, has led to the heliport.

Among the most prominent advocates of MFFP is Adair Turner, whose latest book, Between Debt and the Devil, provides an insightful thought experiment on the use of helicopter money. Turner and his fellow MFFP advocates seem to believe that placing more money in the hands of the public is practically always welcome. In their view, it is not only a straightforward way instantly to boost real demand; it also seems preferable to debt-financed fiscal stimulus, owing both to political constraints on debt-burdened governments and to MFFP’s more direct – and thus faster – impact on economy-wide spending.

But MFFP could easily produce too much demand. The only guarantee against an inflationary surge in this scenario is the prudence of policymakers.

But their incentive to limit inflation may not be particularly strong. In fact, throughout history, governments have had strong political incentives to monetize the deficit, with the subsequent inflation reducing the debt burden (and effectively confiscating the borrowed savings). That is why inflation is so much more prevalent in history than deflation. Yet no MFFP proposal even recognizes this tendency, much less includes provisions to avoid it.

Of course, central banks are independent from government precisely to ensure that their policies are utterly pragmatic, instead of being shaped by partisan politics. But, in reality, such conduct has been repeatedly absent. Who today still holds up former Fed Chair Alan Greenspan as a paragon of sagacity?

Still, the biggest risk is posed by fiscal authorities, who tend to be more heavily influenced by political considerations. Unfortunately, MFFP, by matching monetary expansion to fiscal expansion, effectively empowers fiscal authorities over monetary authorities.

Turner believes that Japan, in particular, would benefit from helicopter drops. In his view, MFFP is the ideal solution to spur demand, without further augmenting Japan’s already-heavy debt burden. But Japan’s large public-debt burden is dangerous precisely because of its potential to spur inflation, through the monetization of the debt. In this context, introducing MFFP – a policy that is even more likely to destabilize prices – seems dangerous.

Japan has made this mistake before. In 1931, after more than a decade of deep deflation, Finance Minister Korekiyo Takahashi used debt-financed fiscal expansion to bring about a domestic economic revival.

But Takahashi knew when it was time to rein in spending, and in 1934 he attempted to do just that. His focus on reducing military expenditure, however, attracted strong opposition from army officers, who assassinated Takahashi in 1936. His successor allowed the military budget to swell, funded by newly created money. This stimulated rapid inflation, which was brought under control only after the reconstruction following World War II.

Today, Prime Minister Shinzo Abe’s approach to monetary expansion – central to his “Abenomics” program for economic recovery – is producing positive results, especially in the labor market. The job-to-applicant ratio stands at 1.28, its highest level since 1991. The wages of part-time workers are, for the first time in Japan’s history, rising faster than those of full-time employees.

Moreover, prices of food products have started to increase. Japanese companies are generating strong profits (Japanese stocks may even be undervalued). And, although GDP is growing very slowly, and even turning negative from time to time, gross national income continues to rise steadily. It seems clear that, rather than risk triggering inflation, Japan should continue on this promising path.

And, indeed, even Turner has offered an alternative proposal that fits with this scenario. He recommends that Japan continue its current method of monetary easing – which can boost demand, while maintaining some safeguard against inflation – and postpone its forthcoming consumption-tax hike. While fiscal stimulus and monetary expansion do not always have to go hand in hand, under current circumstances in Japan, this proposal makes sense.


Koichi Hamada, Special Economic Adviser to Japanese Prime Minister Shinzo Abe, is Professor Emeritus of Economics at Yale University and at the University of Tokyo.

This content is © Project Syndicate, 2016, and is here with permission.

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38 Comments

Let's take a look at the failed US monetary stimulus experiment.

In the broader economy, calculated inflation through the Fed’s preferred metric, the PCE Deflator, continues its astounding underperformance. To my knowledge, the Federal Reserve has yet to disallow its own ability or remove its inflation target, and yet the PCE Deflator fell below 1% year-over-year once again in March. That represents the 47th consecutive month below the set 2% inflation target, meaning that as powerful as the Fed supposedly is in mainstream lore it has a very peculiar way of showing it. That is even more curious given that there were two additional QE’s offered (amounting to $1.7 trillion in balance sheet expansion) in tandem with continued interest rate “accommodation” the entire 47 months.

It all adds up to a dispositive lack of evidence for either the recovery or monetary competence. The 2% target, whether or not you agree with the intention (and I really, really don’t), is the primary task given to the agency. A four year deviation is not some temporary problem to be waited out, it is indicative of serious disruption in the expected monetary flow (and once again points to the fact that they really don’t know what they are doing). That there would be only worsening economic circumstances alongside that structural deformation is unsurprising.

Going four years without hitting your inflation target, and actually having your preferred inflation measure only get further away, despite $1.7 trillion in additional “money printing” can only mean that central banks aren’t what they are made out to be. That possibility does seem to be creeping into the mainstream conversation, as broken expectations can only foster blind faith for so long. Read more and more

Nothing like getting Austrians to look at others economics polices and declare failures is there.

a) US stimulus in 2009, did we get a second Great Depression? no we did not maybe then that should be heralded as a success.

b) The size of the stimulus was too small and indeed much of its make up was done using in-effective vectors.

c) Dont agree with 2%? not sure what then he thinks is sound? 0%? 4%? Paul Krugman thinks it should be closer to 4% and has thought that I believe since 2008~9 until such time as the world recovers (it wont due to peak oil but that's another matter)

d) Maybe the CBs are not hitting their targets due to (i) their Govns austerity and general negative behavior. (ii) their own right wing ish orthodox outlook making them unable to grasp

e) Your reply is seems fails it seems to offer an alternative? though hints at austerity and/or raising rates, two actions shown to make things significantly worse.

So easy to say it isnt fixed when in fact there doesnt seem to be a better option that is politically palatable. yet Steve Keen suggests there is, a debt jubilee, ie pay everyone $100k. with the proviso it has to clear debt first.

The Federal Reserve have been fighting the supreme power in the US, The House of Lords aka "The Senate". Senators are extremely wealthy and for the most part elected for life. They seem to want a balanced budget, even a trade surplus, but certainly a high USD. They get what they want, never mind the Federal Reserve and the Administration, who are allowed, indeed encouraged, to posture and profess that inflation is good for the people.

It is all part of the US smoke and mirrors to keep the populace in their place. The US chose the Roman model and got a truly Roman Plutocratic State, and world domination to boot.

Trouble is, eventually even Rome fell apart, once all citizens were enslaved (mortgaged) they didn't see the point of it anymore. and the Vandals and Goths took their revenge.

One last surge in the USD and the dominoes will fall.

The NZ Govt could run a mini-QE programme by fully funding or increasing funding to Hospitals, Schools, Universities, Police, Roading & Rail projects, etc, direct Social Housing, increase military spending, stimulate fiscal policy, and accept a deficit for the time being. This is not the time to be obsessed with surpluses.
At the same time they should reduce immigration down to 30k, reduce Universities etc dependency on international students for purely financial reasons, stop housing purchases by any non-citizens,
Start economic development projects in the regions, etc.
The problem with the Key Govt is that they are trying to abdicate all of their responsibilities by trying to exit out of every government responsibility and service. Rogernomics by stealth? With a touch of Muldoon.

The NZ Govt could run a mini-QE programme by fully funding or increasing funding to Hospitals, Schools, Universities, Police, Roading & Rail projects, etc, direct Social Housing, increase military spending, stimulate fiscal policy, and accept a deficit for the time being. This is not the time to be obsessed with surpluses.

Can you outline a mandated mechanism that channels NZD credit from the RBNZ's keyboard ledger to the respective intended recipient.?

Currently, liquidity injections, depending on conditions, demand our banks borrow USD offshore and enter into currency swaps with the RBNZ. In effect the RBNZ gains foreign reserves and credits banks' settlement accounts at the RBNZ with NZD. And there these reserves remain to facilitate interbank settlement demands until the swaps expire.

Here is an extracted comment from an RBNZ document detailing the extra liquidity injection mechanisms undertaken around the world after the GFC struck.

The Reserve Bank of Australia (RBA) responded to the crisis by expanding the range of securities accepted as collateral in its open market operations, extending the term of repos, and increasing the supply of deposits for banks at the RBA. These policy initiatives helped restore confidence in the money market, and resulted in narrower BB-OIS spreads.

What you really need to do is describe how central bank liquidity injections crediting the banks' accounts at the central bank can miraculously arrive at a hospital's bank credit ledger without the banks funding such endeavour in the normal interest bearing loan creation manner.

Increase taxes, - income tax is relatively low, even compared to Australia.

Print money, and/or raise Govt bonds internally. Why borrow, when you can print? Sure, it devalues our money, but may be better than selling all our assets.

The current settings are really selling us out, & dismantling every govt service for its citizens.

Or revert to Cullen's prudent pre-Nat income tax reduction for the weathy whilst "taxing" by increasing fees and levies for the non-weathy, saying that those fees and levies aren't really "taxes.")

QE always involves the purchase of an asset in exchange for a credit lodged in the authorised asset seller's account at the central bank - how else to balance the books? Think about the details of that which I posted above. Do hospitals have ready access to bond or USD collateral without defeating the purpose of your proposal?

Does QE always really intend to balance the books?
With your knowledge and experience, you might be able attempt to answer your own question.
How are other countries QEing or financing fiscal policy in alternative ways?

Failing miserably.

In nominal terms, Japan appeared to be moving forward especially in exports but in reality QQE hollowed out the actual economic base even more than it already had been. Some Japanese corporations have seen record nominal profits, but the Japanese labor force participates less and less - no matter what the unemployment rate says. Read More

"The NZ Govt could run a mini-QE programme by fully funding or increasing funding to Hospitals, Schools, Universities, Police, Roading & Rail projects, etc, direct Social Housing, increase military spending, stimulate fiscal policy, and accept a deficit for the time being. This is not the time to be obsessed with surpluses."
Or recall the income from the asset sales from the Chinese Asia bank and put it into the above, which is what we were told it was going!!! They lie, lie, lie and no one holds them to account.

And the Power companies. What happened to those sales proceeds?

That's what I meant. They used a big chunk of it to help setup the Asia bank that China started.

Siphoned off into the bank accounts of 'management teams'.

Putting money into opex is a bad idea as its open ended. Putting money into capex on the other hand is then a one off. So sure building social houses and one off projects, yes good idea. Capital projects where you can then save $s in opex, yes. Do the Unis need more $s? not from the little I can see. Some free tertiary education for selected courses? yes if its limited to say 3 years.

"The problem with the Key Govt" yes I totally agree.

Why is everyone so opposed to giving money to the people? Fear of success seems to be an issue. I could understand the fear if we had rampant inflation across the whole economy. Put $1000 into every individual's bank account and watch the latent demand be put into action.

The RBA claimed it would be hard to turn off the money yet they borrowed to put money in people's accounts as a one off event. That's just managing expectations.

All that needs to happen is do this as a one off event, monitor the results and publish an objective account. That's more effective that all the hot air about helicopter money, and if it didn't work then Milton Friedman was wrong. If Milton Friedman was wrong then all of his theories need to be thrown away.

Cause free money devalues its worth is why! Jezz, give everyone $1000 and watch as the very next day power companies put up their prices, petrol companies put up theirs, cafe's, councils, real estate agents, LANDLORDS.....
etc etc. $1000bucks gone in 3 months flat, and just a new level to the cost of living.

It's the same principle with far to easy 'credit'.

Try getting past economics 101 by reading Steve keen for that, a debt jubilee.

Steven, I already know about SK idea and I don't agree with it or think it will work. The reason being it doesn't actually teach any lessons to those who have burdened our economy with THEIR debts. It also does nothing to address the issue of property hoarding

We're creating money at an extremely fast rate, it's just slower than everyone else. Also what you are suggesting is that we would get inflation, something RBNZ desperately needs and doesn't have. Arguing against what would be positive at this time doesn't make a lot of sense.

There's also stage two where employers with increased income need to be encouraged to pay more, otherwise the spending goes away.

'to distribute newly printed cash directly to consumers'

Consumption [of food, energy, resources and stuff in general] is at the heart of the predicament humanity finds itself in, and attempts to stimulate consumption simply increase the magnitude of the predicament.

The vast majority of people in the western world would benefit immensely from eating less, driving less, shopping less, having smaller houses and having less stuff. The local environment in most places and global environment certainly would.

However, the financial-economic system is predicated on ever increasing consumption; it is therefore mismatched with the planet we live on, which does not get bigger every day; in fact, terms of absolute resources and resources per capita it actually gets smaller every day.

The mismatch between reality and the ideology that characterises the western financial-economic-political system is manifesting in all sorts of very unpleasant ways. However, the financial-economic-political 'progress trap' cannot be escaped from without completely upsetting the apple-cart, so all the undesirable repercussions from overconsumption will continue to burgeon, and governments and economists will continue to think of ways to make matters worse......until they can't..

Excellent. The first time I have heard anyone else mention what really happened to the venerable Korekiyo Takahashi, head chopped off as he slept. He is everyone's inspiration for QE etc as Japan recovered fastest from the 1930s depression. Ben Benanke got all his ideas from Takahashi San.

The Cult of Central Banking is Dead in the Water!

The world is drowning in excess production capacity owing to the massive worldwide credit inflation and repression of capital costs during the last two decades. That was the effect of total global credit growth from $40 trillion in the mid-1990s to upwards of $225 trillion today—-an $185 trillion expansion that exceeded the growth of global GDP by nearly 4X during the same period.

Under this condition the diversion of corporate borrowing to financial engineering and stock buybacks is a no-brainer. Prospective returns on real productive assets are jeopardized by the immense overhang of excess capacity and the unfolding contraction of profit margins and CapEx, whereas stock buybacks and M&A deals bring immediate excitement and financial rewards to the C-suite.

So we go back to the beginning. The Fed and central banks in general are pushing on a fiat credit string because Peak Debt has arrived. All of today’s massive central bank intrusion is ending up in the secondary markets where it is causing the falsification of financial asset prices and massive, unearned and ultimately destructive windfall gains to speculators.

Here’s the essence of the Keynesian full employment/potential GDP myth. The learned economic doctors have simply pulled a fancy version of the old story about the professor of economics who fell into a 30-foot hole with a colleague. At length, the latter inquired about the professor’s plan to get out. “Assume we have a ladder”, said he.

There is absolutely nothing more to potential GDP and the so-called output gap than an assumed ladder. In the context of an $80 trillion global GDP enabled by today’s massive trade, capital and financial flows and current information technology, “potential output” is impossible to measure and is constantly changing.

So there is no grand Keynesian economic bathtub whose full employment dimensions can be measured; and there is no way for the Fed or other central banks to fill it right to the brim with extra demand stimulus, anyway. Peak Debt has blocked the monetary policy transmission channels.

http://davidstockmanscontracorner.com/the-cult-of-central-banking-is-dea...

Actually Steve Keen says a debt Jubilee is probably the only way, and historically these are not un-tested and actually seemed to have worked.

And what happens to the assets of those who have their debts wiped? And how much do you pay those with a cash injection who have no debts? What percentage or ratio? What debt asset classes are eligible for the DJ? How would it address the current economic inequalities?
Steve Keen gets very light on detail around these points

The debt Jubilee concept mooted by Keen would involve a credit to all:
Steve Keen from 2012:
In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a “Modern Debt Jubilee” should take the form of “Quantitative Easing for the Public”: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public—but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency. - See more at: http://www.debtdeflation.com/blogs/2012/07/22/the-crisis-in-1000-words-o...

A public debt created to extinguish a private one, nonetheless. What extinguishes the central bank liability? Does society pay it back or are the newly unencumbered physical assets pledged to the central bank and subsequent sale proceeds offered up to cancel out the money printing liability? - answers on the back of a envelope welcome.

Exactly, so the public will end up just paying like we are already for QE, more taxes on including many of us who played absolutely no role in getting to this point like people who chose to live within their actual means. A DJ is just more passing the buck of accountability.
It's just another gutless way of letting those responsible off the hook.

Who keeps the assets once the debts paid off KD? Remember we are talking about in many cases 'homes' that are in too fewer hands being the problem . Example a landlord with 100-1000 properties in their portfolio. So their debts get paid off do they? To what amounts do 'savers' or those with no debts get compensated?

While superficially this may appear attractive, I have some questions;
The country some how needs to create consumption, and therefore inflation, it also needs to generate income. These outcomes require jobs, and exports (tourism is not the universal panacea). From my perspective a debt jubilee targeted on reducing debt first would only see 80 odd % of it end up in the banks coffers, so how would this be constructive? Would it be more beneficial to target it at people who's net worth is less than $1 mill? This would assume that the rest would have the income to drive some level of consumption anyway, while those line up to recieve it would genuinely have real debt, or be in a position to invest the money. If we are driving consumption, will this only lead to more imports? How does the country benefit from that? How will jobs be created from a debt jubilee? The questions keep coming...

I'd rather have money go directly to people. That aside the central bank paying off debts would end up in bank coffers. However for a lender that's a massive problem, you don't want piles of idle money sitting around instead they want debts making them money. It would create an emergency within the banks and they would want to lend out a lot of money due to massive fall in profits.

Doing that would actually shrink the financial sector and they would probably be forced to lay off workers to maintain returns for their shareholders. It would get spending back into the productive parts of the economy but it would be a bit painful.

The other way that has a similar effect is bankruptcy. Except the debt is written off and no central bank involvement is needed beyond increasing interest rates. That's also painful.

Presumably the SK debt jubilee would occur with a concomitant rise in interest rates and lowering of asset prices. Although Keen advocates the debt jubilee he doesn't actually think it will happen. According to some of his youtube videos he thinks it's more likely we'll see a severe recession depression with massive bank foreclosures insolvency etc.

'Nothing Is Real: "It's All Being Played To Keep People Believing The System Is Working"

.....It’s created a population boom… a population boom has risen in tandem with the debt. It’s incredible.
So, when the debt bubble bursts we’re going to get a correction in population. It’s a mathematical certainty. Millions upon millions of people are going to die on a world-wide scale when the debt bubble bursts. And I’m saying when not if…

When resources become more and more scarce we’re going to see countries at war with each other. People will be scrambling… in a worst case scenario… doing everything that they can to survive… to provide for their family and for themselves.

There’s no way out of it.'

http://www.zerohedge.com/news/2016-04-30/nothing-real-its-all-being-play...

Economists that work in the RBs all over the world understand concepts like liquidity traps and yet have persued zirp policies with a full knowlege that it will cause problems. To me the world economy has been subsidised for 8 years, and we wonder why it's not working? Maybe because the growth isn't real, as discussed above.

The global economic situation is due to one of two causes

1) - The US does not want a recovery while they are doing their best to destroy Russia.
If economies start to grow the demand for oil will grow and prices will rise.
This will benefit Russia,

2) - Global incompetence and corruption

I cannot think of any other reason. Can you?

"The global economic situation is due to one of two causes"

I give up, which one of those causes is it.

There's a lot of politicians that want to remain in power. If the people discover they are running their country into the ground they will be voted out. They just keep kicking the can.

There is only one thing in the whole world that can be created from nothing and wield so much power. That is money.
Money is an illusion that can perform any task the designer chooses.

Even God could not have dreamed such a thing.

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Days to the General Election: 36
See Party Policies here. Party Lists here.