Friday, January 27, 2012

UK economy needs a shower of money


Printing money might not be dignified, but it does work – just keep the banks and the credit rating agencies out of it
It works like this. You get De La Rue to print £14bn of banknotes, roughly the amount extracted from high-street spending in extra VAT this year. You send a fleet of vans to transfer the money to Northolt and other regional airports. You load it into squadrons of RAF helicopters and, in full view of television cameras, scatter it over shopping streets the length and breadth of the land. The notes are designed to disintegrate within six months and can be banked only by registered firms. Those finding them must spend them fast on goods and services.
"Helicopter money", once a satirical monetarist metaphor, suffers only one serious objection as a cure for a nation suffering from collapsed demand. It is vulgar and undignified. It seems tacky, populist, messy, a smart-alec suggestion not fit for consideration by ministers, bankers or economists.
Read the rest at The Guardian (UK)
The UK economy needs a shower of money in the high street
by Simon Jenkins
(h/t Ralph Musgrave via email)

Goes a bit out of paradigm, but the basic idea is correct. The UK needs a fiscal injection, not more blood-letting in the form of "expansionary fiscal austerity."

Ben Bernanke got this more or less in his call for a helicopter drop, but the less got in the way. Kevin Depew explicates "helicopter drop":
Let's look at what Bernanke really said and what he really meant:  

"A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money."
Yes, it was Milton Friedman who "invented" the helicopter drop of money analogy, but Friedman's invention was actually based on John Maynard Keynes theory of the Liquidity Trap.
A Liquidity Trap occurs in a low-interest rate environment with stagnant economic conditions and high savings. During this environment monetary policy becomes ineffective. Why?
Because under these conditions people believe that they will not receive an adequate return for the risk assumed in owning other financial assets, even bonds, so they prefer to keep cash in short-term bank accounts. In other words, they hoard cash. Sound familiar?
The most frequently misunderstood aspect of the "helicopter drop of money" analogy (from Keynes to Friedman to Bernanke) is that it refers to actions on the part of a central bank, but this is not true.
Bernanke used the phrase in his speech in a section explicitly discussing Fiscal Policy:

"Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money."
 Five Things You Need to Know: Deflation... And the Headstones Climbed Up the Hills
By Kevin Depew at Minyanville

MMT looks at this more simply. The sectoral balance approach and functional finance show that a fiscal injection by government increases non-government net financial assets, thereby providing the public with room to meet an increase in the desired level of saving, thereby facilitating deleveraging after a financial crisis while also stimulating the effective demand needed to close the output gap and reduce unemployment.

Corresponding monetary policy to keep interest rates low is not required in that inflation is not an issue with high unemployment and a wide output gap, which allow the economy to expand to meet increasing demand from the fiscal stimulus without resulting in a continuous increase in the price level (definition of inflation). When fighting deflation, high unemployment, and economic contraction, inflation is not a concern at that time.

1 comment:

Tom said...

Those last two paragraphs sum up MMT's position very well Tom.

To us it seems so simple, but to so many its so foreign. I wish more people understood those last two paragraphs.

-Another Tom