Helicopter Money is not the answer to our economic problems

One of the features of the credit crunch era is the way that policies which seem extraordinary have a way of coming to fruition. We have seen many examples of this in the world of monetary policy. The two headliners would be negative interest-rates and Quantitative Easing or QE bond buying. The latter had previously only been a feature of the response to the “lost decade” in Japan but is now widespread. If it had worked we would not be discussing the “lost decades” but that seems to bother only me. Also these moves are invariably badged as temporary but so far none of them have gone away. Indeed in my home country the Bank of England is currently making QE look about as permanent as it can be.

As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).

It will reinvest another £1.27 billion today but it is tomorrow that will be the real example of “To Infinity! And Beyond!” when it buys long and ultra-long dated Gilts.

These themes were on my mind when I noted this in the Daily Telegraph.

A radical world of “helicopter money” – where central banks fund government spending – is “inevitable” as policymakers run out of ammunition ahead of the next recession, top economists have warned.

Central banks are likely to “explore more unconventional policies” in the next downturn and blur the lines between fiscal and monetary policy with radical new tools, such as monetary financing, Deutsche Bank argued.

Let us just mark the issue that Deutsche Bank are top economists and move on. As to the details here is the original suggestion from Milton 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.

Those of you who follow me on social media will know that I note the daily RAF Chinook flights over Battersea as they could carry a lot of notes. Perhaps they could name them “Carney’s Cash” and “Broadbent’s Bonanza” for the occasion.

The one time this sort of thing was tried it was in fact via a tax rebate in Japan and amounted to £142 if my memory serves me correctly. However being Japanese they mostly saved it so it was not repeated. So any UK repetition of this would be different as if you look at out habits we would be likely to spend it which starts well but then of course would be likely to make our current account deficit worse. Here from this morning is a reminder of it.

The UK current account deficit narrowed by £7.9 billion to £25.2 billion in Quarter 2 (Apr to June) 2019, or 4.6% of gross domestic product (GDP).

Whilst it is welcome we did better the overall picture is this.

The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998 or, when considering annual totals, 1983.

So there is an issue although I have many doubts about the accuracy of the numbers especially when we get to investment flows. Let me give an example from the savings numbers released this morning.

The most notable recent revision was in 2017, when the previously published lowest annual saving ratio on record was revised upwards from 3.9% to 5.3%, meaning that the lowest annual saving ratio on record is now observed in 1971 where it stood at 4.8%.

If you remember the media furore at the time that is quite a big deal. Also it gets worse.

The annual households’ saving ratio in 2018 was revised upwards 1.9 percentage points to 6.1%.

Let’s us move on by noting how an emergency measure is being presented as almost normal which of course is more than familiar. We will know when they intend to begin it because we will see a phase of official denials as they get their PR spinning in first.

GDP Growth

This morning’s UK release was rather inconvenient for the monetary expansion apologists as we saw this.

UK gross domestic product (GDP) contracted by an unrevised 0.2% in Quarter 2 (Apr to June) 2019, having grown by an upwardly revised 0.6% in the first quarter of the year.

This meant that the annual rate of growth rose to 1.3% which is better than the Euro area’s 1.2%. I point this out because Michael Saunders of the Bank of England was telling us on Friday that we were in a weaker position. Also there was this.

Annual GDP growth in 2017 is now estimated at 1.9%, revised up from 1.8%,

So we move on knowing that the past was better than we thought. or if you prefer that economic growth has slowed by less than we thought.

Money Supply

There has been an improvement in recent months and here is this morning’s release from the Bank of England.

Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFCs) and NIOFCs. In August, money holdings rose by £10.4 billion, with positive contributions from all sectors.

 

The total amount of money held by households rose by £4.6 billion in August. This was primarily due to a large increase in non-interest bearing deposits. The total amount of money held by NIOFCs rose by £3.3 billion, while the amount held by PNFCs rose by £2.5 billion.

Sorry for their love of acronyms and NIOFCs are non intermediating financial companies.

This means that the annual rate of growth for broad money is 3.3% as opposed to the 1.8% registered in May. The main changes have come in July and now August.

If we switch to M4 lending which is sometimes a useful guide then things have improved considerably as the rate of annual growth has pushed up to 5.5%. As mortgage lending remained pretty similar it has been driven by this.

Borrowing by financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs), rose to £16.6 billion in August, the largest amount since monthly figures were first collected in 2009. Fund managers were the largest contributor to this strength.

Thus as so often with this sort of data ( bank lending) we are left wondering what the economic impact will be?

Consumer Credit

This continues on its merry way.

The extra amount borrowed by consumers in order to buy goods and services fell to £0.9 billion in August, slightly below the £1.0 billion average since July 2018.

The Bank of England are keen to point out this.

The annual growth rate of consumer credit continued to slow in August, falling to 5.4%. This remains considerably lower than its peak of 10.9% in November 2016, and is the lowest level since February 2014.

There are several elements of context to this. Firstly the rate of growth has been so fast it has raised the total to £218.6 billion so percentages would naturally fall. Also the weakening of the car market has contributed. Next the numbers are still much higher than anything else in the economy.

Small Business Loans

Remember when the monetary easing was supposedly for smaller businesses? Well there is a reason why that went quiet.

In contrast, the growth rate of borrowing by SMEs weakened slightly to 0.7%.

Comment

If we consider the overall situation we find several problems with helicopter money. The first is that it is supposed to be an emergency response when we keep being told we are not in an emergency but rather a recovery. It is a bit like putting an electric shock on a heart which is still beating. The next is that it would be an extraordinary move and yet again a big change would be made by unelected technocrats. This reminds me that some years ago I made the case for Bank of England policymakers to be elected. Finally it is just another way of the establishment making things easier for itself at the expense of the wider population.

This is because the wider population would be at risk of inflation and maybe much more inflation. This need not be consumer inflation as so far in the credit crunch era we have seen moves in asset prices such as bonds, equities and house prices. The latter of course allows the establishment to claim people are better off when first-time buyers are clearly worse off. Putting it another way this is why they are so resistant to putting house prices in the inflation indices and the new push to use fantasy rents suggests they fear helicopter money and negative interest-rates are on the horizon.

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22 thoughts on “Helicopter Money is not the answer to our economic problems

  1. If the GFC showed us one thing, it was that there wasn’t enough central bank money in the system. Central bank money, of course, takes two forms: one that we are all familiar with and can hold – banknotes – and another which is the electronic ledger form of banknotes, that only the central bank’s customers (mainly commercial banks) can hold. This second form of central bank money, often referred to as central bank reserves (or just reserves) is mainly used by the commercial banks to settle payments between themselves. Whilst the quantity of banknotes in circulation is and has always been demand led, banks used to have this notion that they should try to operate with the bare minimum of reserves on the asset side of their balance sheets (in fact the Sterling Monetary Framework at the time encouraged them to do do). Whilst this was fine when everything was stable and payments between banks tended to net out across the settlement cycle, clearly there was an insufficient aggregate quantity of reserves in the system to settle all the payments, transfers and withdrawals when the proverbial hit the fan.

    Now, the thing about central bank money – both banknotes and reserves – is that only the central bank can create and supply it. We don’t let any old Tom, Dick and Harry create it. We have given the right to do so to the central bank, as a monopoly power. (There’s nothing to stop Tom, Dick and Harry creating their own money and trying to get it accepted, though, although they might have only limited success). Central banks, like any bank, create their own money as their liability (or debt) by acquiring assets from their customers (in this case commercial banks, who might well acquire the same assets from their own customers, creating commercial bank money in the process).

    After the GFC, we told the banks ‘never again’. We demanded that our banks and our banking system should be made orders of magnitude more resilient and safer. One upshot of this is that banks have to source way more of their funding from shareholder equity and long dated bonds subject to bail in and less by using liabilities called ‘deposits’, or as we might call them ‘money’ (which has huge implications for the broad money supply, but that’s a slightly different story). We also demanded that they should be way more liquid, holding an amount of reserves that would allow them to weather outflows for several weeks without having to borrow them from the central bank. The upshot of this is that whereas banks in the UK, in aggregate used to hold about £25bn of reserves, they now need to hold about £500bn. Add in the fact that the likes of you and me used to want to hold about £50bn of banknotes, but now want to hold about £75bn, we see that the liability side of the Bank of England has expanded from about £75bn (reserves + banknotes) to about £575bn. How did it expand the liability side of its balance sheet? By acquiring assets and expanding the asset side of its balance sheet (a balance sheet has to balance, after all). What assets did it acquire from its customers? Mainly Gilts. What did we call this process? We called it QE.

    Now, if you take the view that its a good thing that banks are way more liquid, holding way more reserves than the bare minimum they used to, then you have to be able to explain why it would be a ‘good thing’ for the BofE to unwind what it has done – by selling assets, reducing its liabilities and thus reducing the amount of central bank money in the system and therefore the amount of reserves that commercial banks hold.

    If you you can’t explain this, you have to accept that QE will likely never be unwound and, far from this being a ‘bad thing’ is actually a very good thing indeed.

    • Yes this is the argument that the existing QE does not in itself produce inflation as it merely swops Gilts for commercial bank reserves. Which would be true if nothing ‘leaked’ form the system into other assets held by other orgs/people. But I think we can safely say it did leak into vast asset inflation, and now we are all suffering from the direct effect of that asset inflation ( in housing) and indirectly as the owners of that extra wealth want to use it in disruptive investments.
      More direct central bank money in the form of Government support of ‘helicoper money’ for the peasants, would ordinarily have a direct inflationary effect. However that is when negative interest rates will be used to destroy money to provide the counter balance.

      • I think it’s sort of incumbent on you to explain exactly how this ‘leakage’ occurred.

        As I note in passing in my original post, the BofE explicitly targeted assets for purchase that it could be fairly sure the banks only maintained a small stock of, meaning they themselves would have to purchase those assets from their customers, creating commercial bank money (deposits) in the process. However, it should be noted that commercial banks creating commercial bank money by acquiring assets from non-banks (and destroying commercial bank money by disposing of assets to non-banks) is something that happens all day everyday. Clearly, the original aim of QE was to increase the stock of broad money, with the increase in reserves being seen as a side-effect. Subsequently, however, the effect of the liquidity coverage ratios mandated as part of Basle3 means that the reserves created by QE are actually required (with more than had been created by QE having to be injected by other means to meet the demand).

        Clearly, these reserves cannot ‘leak’ out of the banking system, since they can only be passed between those with accounts at the central bank, being used to settle payments and to meet the requirements of Basle3.

        So attention usually switches to the broad money that was created by QE. Did this ‘leak’ into house prices and into other assets? Well, as I also note in passing in my original comment, the other main measure taken to improve the stability and safety of banks involved banks having to persuade their customers to destroy commercial bank money that the customers held as deposits and accept equity shares and long dated non-deposit liabilities instead. The amount of money destroyed by this process isn’t as easily ascertained as the amount created by QE, but the amounts involved in both processes are definitely very similar.

        So taken together, QE creating broad money and bank capital replenishment destroying broad money, means there probably isn’t way too much money ‘sloshing around the system’ as many believe. The reasons for house prices being high (as well as classic cars, art and fine wines) can be found elsewhere, which I believe I have gone into before – the demand for assets, both financial and physical is outstripping supply.

        • Commercial banks are stocked full of people with integrity. Heaven forbid that I should think that non banking financial institutions had any role in this. And all those law abiding multi-billionaires just kept their usually grasping hands firmly in check. Silly me.

        • re : “isn’t way too much money ‘sloshing around the system’ as many believe”

          and

          “the demand for assets, both financial and physical is outstripping supply.”

          !

          anyone else like to comment ?

          Forbin

        • The question of leakage is mixed up with human psychology and lifespan. Once the QE-created money is set to remain in the system longer than the working lifetime of a senior central banker, then psychologically speaking it has become real money with real inflation effects. Yeah, in theory it will all be vacuumed back up again but no one actually believes that will happen in a timescale that matters to them and they act accordingly. Once the event-horizon is further away than the full working life of a new job-starter, the difference between QE and printing money is more or less completely one of spelling. It has no real effect on any actors in the system because they make their decisions – even the best of them – based on their own perspective and if that perspective is “well, I’ll be dead” you’re never going to get quality decision making from anyone except the odd genius. So the QE leaks out in strange ways, in the decisions people make and the way the “real” money flows about as a result of those decisions.

          QE as presented was a reasonable idea – if you believed it – but as actually executed it is a complete failure and has created wealth losses for the vast majority (crippling ones for some) while lining the pockets of a small class of operators – both commercial and in the banking world. The whole system is circling the drain of ever more negative interest rates which ultimately will lead to a complete collapse of the idea of banking as people with the money and thence the power (and ultimately money comes from power, not the other way around) to find an alternative are ever-more incentivised to do so. Banking didn’t fall out of the sky – it’s an invention, and like any other invention it can become obsolete if it stopped performing the function needed from it.

          Every time there is a financial crisis the period immediately beforehand is full of people proclaiming that “economics is solved” or “the system is completely safe”. But it never is, because it can’t be. Economic systems are inherently and unavoidably unstable and the mathematics are unsolvable even in theory (see Gödel, Church, and Turing for details); there is never a perfect answer, all you can hope for is a good answer for *today*. Never forget that it might all break down tonight, quite literally. QE is a patch that has slowed the breakdown; it’s not stopped it let alone reversed it and it came with a big price.

          You seem quite complacent in light of history, to me.

          • I think you can only judge QE as a failure if you had unrealistic expectations regarding what it was able to do.

            It was never going to ‘bail out the banks’. You can only do that with equity capital
            It didn’t ‘give money to the banks’
            It was never going to enable banks to lend more than they were. Again, they required equity capital to do that.
            It can’t really create inflation in goods and services
            It might have some effect in preventing deflation in goods and services
            In isolation, it might push up the price of certain long dated financial assets, but probably not as much as the increased supply of the same financial assets would push prices lower.

            What it could do was

            Create more central bank money in the form of reserves. At the time this was thought to be a completely benign side effect, but has since proved to be a suitable method of supplying the reserves that banks are now required to hold.
            Create more commercial bank money to counter the commercial bank money that was destroyed to create bank equity and equity-like liabilities and due to the general deleveraging seen in the banking system.

            It was the second of these objectives that was the most important and, given that broad money has been created to replace that which was being destroyed, it can be said to have been a success. Remember, that nobody was forced to participate in QE. Anyone who owned Gilts (which are effectively a balance in a government guaranteed savings account) was asked if they would like to switch that into a balance in a current account. Those that wished to, did and those that preferred to remain having a balance in their savings account, didn’t.

    • Robert, in your usual role of defender of the central banks, you seem to be missing one key point – namely the headline of Shaun’s article, in that QE has moved on, and since it clearly hasn’t worked and the worlds economy’s are now stalling with even more debt piled on, there is simply no way back for central bankers -they are trapped and have to perpetuate QE FOREVER, hence Shaun’s reference to Helicopter money which will be the inevitable outcome in addition to the monetisation of exponentially expanding government balance sheets and hence one massive step nearer to communism.
      I’m sure you will have endless arguments as to why the coming “QE forever,”debt monetisation and deeply negative interest rates will be something to look forward to, and will greatly benefit us all, just confirming how much cleverer our masters are than us and how we should all be grateful to them for destroying our savings and pensions in order to prove they were always doing the right thing and doing it in our best interests, but don’t bother, noone believes that story anymore, there are just too many good economists and commentators that have shown central banks to be the charlatans that they are, with only two tools – cutting rates and printing money.

      • I wouldn’t say I’m a defender of central banks. More an explainer of central bank operations.

        I grant you central bank operations are actually pretty boring, so if you’re relying on ‘clicks’ to make a living from a blog, the last thing you want to do is explain central banking in a clear, concise manner!

        Anyway, why not have a shot at answering the question I posed. Do you think the quantity of reserves being held by banks currently, in order to make them liquid, is too much, too little or just about right?

          • never worked at the BofE or any central bank

            Did work for more than 20 years in banking and a few years in related fields. During that time I was like probably everyone else commenting here and I would say 99% of my colleagues, in that I didn’t have the faintest idea what money was, where it cam from and how it worked, nor the faintest idea of what a bank actually did (as opposed to what we are are taught they do) and not really a Scooby about what a central bank was for or how it interacted with everything else.

            I, like probably everyone here, was seriously alarmed by QE, believing (because of my complete lack of understanding regarding what it was and how it fitted in to the operations of a central bank and the wider economy) that it would cause hyperinflation due to this thing that everyone was talking about called the money multiplier. I was worried about the effect it would have on my savings and investments, so I decided to look into it further.

            It took a long time. A vast amount of reading and even more thinking – a real brain-hurting amount of thinking – and I now understand that everything I thought I knew about money, banking and central banks was more or less completely wrong. Not just slightly wrong, but completely 180 degrees wrong.

            I’m now no longer concerned about hyperinflation (or even inflation) and I know this ‘money multiplier’ things is a figment of the collective imagination. As I said, it’s been tough, but I really would recommend it. Sure, there’s no ‘clicks’ in it and understanding what is actually happening might not be as much fun as talking about ‘QE to infinity’ and making up conspiracy theories regarding secret plots to enrich one section of society at the expense of another. I get that.

            I just wish I had known back then what I understand now. Then I could have made as much money as Warren Mosler, who did ‘get it’ and made a small fortune from his knowledge and understanding.

    • ‘Now, if you take the view that its a good thing that banks are way more liquid, holding way more reserves than the bare minimum they used to, then you have to be able to explain why it would be a ‘good thing’ for the BofE to unwind what it has done – by selling assets, reducing its liabilities and thus reducing the amount of central bank money in the system and therefore the amount of reserves that commercial banks hold.’

      It is a good thing that banks are more liquid.It’s the economic/social price of that liquity that’s the issue.

      Central banking doesn’t operate in an eco of it’s own.It’s balanced against wages/asset values/commodity price etc.

      The reason they need to unwind QE is that the asset bubble it created was far more detrimental to society as a whoile,than the liquidity problem it aimed to solve.

      I find it hard to read lower down that QE had no part in rising asset prices and rather they were the result of demand side factors.Such a claim,even if you can somehow contort your argument by restricting it to the linear issues pertaining to QE and it’s internal mechanisms within the banking setor, really doesn’t fit with a broader analysis of the economic situation post 2008.

      It also relies on obliquely ignoring the balance sheet buffering effect of consistent fiscal deficits, rising consumer indebtedness and the obfuscation the true value of the loans that lie as assets on a bank balance sheet.

      The simple reality may well be that RBS may have a strong reserve ratio but it’s no guarantee that those Ulster Bank buy to let loans from the early noughties will be fully repaid.

      The hope was, on a political level, that in time earnings would catch asset values up and Joe Public would have no idea they’d been royally screwed over. The fact that we’re heading towards negative rates across the Western world tells us that it hasn’t worked.

  2. Great blog and podcast as usual, Shaun.
    If you recall I alerted you to a paper by Jean Boivin et al. proposing the use of helicopter money in a fresh downturn on August 27. I hope you were finally able to find it and take a look at it. Since its authors included three central bankers who served on four central banks (Stanley Fischer was governor of the Bank of Israel as well as a senior official with the US Fed) it is something to be taken seriously. For me, it was instructive that although none of these people had ever worked with price level targets, only with inflation targets, a price level targeting regime was casually assumed in their paper, without offering any justification for it. Since, by assumption, we are in a downturn, where the inflation rate may have been lower than 2% for a while, a PLT regime in such circumstances would imply a higher inflation rate than 2% for some time in order to meet the price level target. After a few years of that, since the central bank has already changed regimes once, going from an IT to a PLT regime, who is to say it might not change again, going back to an IT regime with the higher inflation rate people had now become accustomed to?
    If you can get past the paywall, check out Konrad Yakabuski’s Globe and Mail report from September 12: “Boivin has unusual plan for next downturn”, which recounts a trip Boivin made to Montreal to discuss his views. Yakabuski is one of the better Canadian business journos, but I noticed he made no reference to “helicopter money”, often used pejoratively, in his report, even though it was used in Boivin’s own paper. From that I take it he is sympathetic to Boivin’s views and didn’t want to use language that might turn off Globe readers in describing them. And they should be taken seriously if, as Yakabuski claims, Boivin is a prime contender to be the next Governor of the Bank of Canada (BoC). The BoC has never had a French Canadian as its governor; it is the only major economic post a French-Canadian has not occupied. Boivin’s relatively young age would also count in his favour.
    Boivin has been beating the gong for PLT, if not for helicopter money, for a long time. It even drew the attention of the Financial Times. In an August 24, 2011 report, “A price-level target for Canada?”, Claire Jones wrote of Boivin’s speech in Kingston at a CABE conference in favour of PLT, when he was still a BoC deputy governor. Lovely Claire noted that: “ If it [the BoC] does switch to a price-level target, it could prove a significant step in consigning inflation targeting to the historical dustbin”, which was sweet of her, but seems to somewhat overstate the extent that the world looks to Canada for economic guidance. At the time, although she doesn’t say it, Carney was also musing about the advantages of a PLT regime so she was not the only person who expected there might be a regime change with the 2011 renewal of the inflation-control agreement in the fall. Carney was already an unreliable boyfriend before he became the Governor of the Bank of England; he just hadn’t yet acquired the label..

    • Hi Andrew and thank you

      I have seen the price level target argument made before. It was Charles Evans of the Chicago Fed a some years ago if I remember rightly. I have just looked it up and it seems he did so in 2010 according to a speech earlier this year.

      “President Evans elaborated on the potential implications for inflation using an illustrative example from one alternative framework. He considered the hypothetical case of adopting a state-contingent price-level target today as proposed by Evans (2010) and Bernanke (2017).
      He noted that, given the inflation misses since the financial crisis, the price level today is more than 4.5 percent below a 2 percent trend line starting from the cyclical peak in 2007.” ( Chicago Fed)

      Although if Robert Pearson is correct poor old Charles will have trouble getting inflation higher as more QE according to him will only raise central bank reserves. Perhaps a trip for him to Chicago is in order to explain this and it could be worse as it is a nice city in my opinion.

      I will be watching to see if the Bank of Canada goes first and starts a trend. It has before….

  3. Hello Shaun,

    re “Helicopter Money is not the answer to our economic problems”

    well yes and no

    creative financial stimulus is certainly on their minds.

    or perhaps just the dessert trolley …..

    This photo of Osco! Restaurant is courtesy of TripAdvisor

    Forbin

  4. Shaun,

    But isn’t “Helicopter Money” tax cuts that cannot be afforded in disguise or government projects and infrastructure which will take years and cost billions when the deficit is still climbing, not to mention anything else the government is planning including the NHS.

    It may well be that some of the above not dropping into peoples pockets but tax cuts would be but in essence anything being done that doesn’t reduce the deficit is like “Helicopter Money” in disguise and so is QE and an extension of the deficit.

    That is the way it seems to me the present fantasy world of economics!

    • tax cuts

      hmm , didn’t we try this with the raise in the personal allowance ?

      not sure how it worked out

      perhaps it should be tried again . Raise it to £21k and see that all those on min wages for a 40 hour week don’t pay income tax.

      Forbin

  5. Pingback: Helicopter Money Is Not The Answer To Our Economic Problems - Free World Economic Report

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