Helicopters on a Leash…

The title reminds you of those war movies where suddenly due to some upcoming.ongoing catastrophe some leader (mostly US) says something like “time to act”. And the next scene is of helicopters and jets begin to make noises ready to fly and conquer the enemy/enemies.

However, the post is to do with central banks using helicopters to drop money. This is obviously the most discussed topic in global economy. Should one leash the helicopters? Adair Turner says time yes we should leash these helicopters on the dead economies:

Faced with a slowing global economy, a number of observers – including former US Federal Reserve Chair Ben Bernanke and Berkeley economist Brad DeLong – have argued that money-financed fiscal expansion should not be excluded from the policy toolkit. But talk of such “helicopter drops” of newly printed money has produced a strong counterattack, including from Michael Heise, the chief economist of Allianz, and Koichi Hamada, the chief economic adviser to Prime Minister Shinzo Abe and one of the architects of Japan’s “Abenomics” economic-recovery program.

I disagree with Heise and Hamada, but they rightly focus on the central issue – the risk that allowing any monetary finance will invite excessive use. The crucial question is whether we can devise rules and responsibilities to guard against that danger. I believe we can and must, and that in some countries the alternative will not be no monetary finance, but monetary finance implemented without discipline.

As I argued in a recent International Monetary Fund paper, the technical case for monetary finance is indisputable. It is the one policy that will always stimulate nominal demand, even when other policies – such as debt-financed fiscal deficits or negative interest rates – are ineffective. And its impact on nominal demand can in principle be calibrated: A small amount will produce a potentially useful stimulus to either output or the price level, whereas a very large amount will produce excessive inflation.

One should not repeat Japan:

Prohibition of monetary finance cannot secure democracy or the rule of law in the face of powerful anti-democratic forces. But disciplined and moderate monetary finance, by combating deflationary dangers, might sometimes help. So, rather than prohibiting it, we should ensure its responsible use. The likely alternative is not no monetary finance, but monetary finance implemented too late and in an undisciplined fashion.

Japan today illustrates that danger. Having eschewed monetary finance for too long, it now has so much public debt (about 250% of GDP) that if that debt were all monetized, excessive inflation would probably result. But there is no credible scenario in which that debt can ever be “repaid” in the normal sense of the word. De facto monetization is the inevitable result, with the Bank of Japan purchasing each month more bonds than the government issues, even while it denies that monetary finance is an acceptable policy option.

If Japan had followed Bernanke’s advice in 2003 and implemented a moderate money-financed stimulus, it would today have a slightly higher price level and a lower debt-to-GDP ratio. Having failed to do that, it should now define clear rules and responsibilities to govern and manage as best as possible the inevitable monetization of some part of its accumulated debts.

The lesson of Japan – but not only Japan – is clear: It is better to recognize the technical case for monetary finance and mitigate the political dangers than to prohibit its use entirely and pile up still greater dangers for the future.

What times..

Most all helicopter based attacks in wars were done to satisfy egos of the President and some jingoism creating widespread discontent. Something similar could happen for using helicopters to revive economy which are being done to satisfy egos of enormously powerful central bankers

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