The Monetary Helicopters Are Coming: Friedman’s or MMT’s?

Well, well, well. Just as I had recently written that whether we like it or not, most central banks would be be following Modern Monetary Theory.

Willem Buiter in Proj Synd piece writes:

With the COVID-19 pandemic intensifying, the United States has just adopted a $2 trillion economic-rescue package (equal to 9.2% of 2019 GDP). The legislation follows  by the US Federal Reserve, which will engage in open-ended quantitative easing, and has introduced new mechanisms to backstop businesses and keep credit flowing.

Much of the US response will come in the form of “helicopter money,” an application of Modern Monetary Theory (MMT) in which the central bank finances fiscal stimulus by purchasing government debt issued to finance tax cuts or public spending increases. The US economy is deteriorating at a spectacular rate, partly because of the direct health impact of the COVID-19 pandemic, but mostly as a result of social-distancing mandates that are preventing people from producing and consuming.

Given the circumstances, it is safe to assume that the Fed’s incremental asset-purchase program will reach at least $2 trillion if that is what it takes to spare the federal government from having to access asset markets directly to fund its new initiatives. In January, before the coronavirus had become a recognized threat, the Congressional Budget Office predicted that the US government would have an annual recurring federal deficit above $1 trillion for at least the next decade.

Interesting. We always thought helicopter financing to be associated with Milton Friedman. Buiter says the helicopters are more MMTish.

MMT does not stop at US:

Meanwhile, the United Kingdom is also pursuing a vigorous experiment in MMT/helicopter money. For starters, the Bank of England is preparing to buy up £200 billion ($238 billion) worth of UK government bonds and sterling non-financial investment-grade corporate bonds – a monetary stimulus equal to just under 10% of 2019 GDP. And on the fiscal side, Rishi Sunak, the new Chancellor of the Exchequer, is unleashing an avalanche of deficit-increasing stimulus measures.

For the calendar year 2020, the British government is looking at a deficit of at least 7.5% of GDP, and perhaps as high as 10%. But even at the upper end, the deficit would still fall within the range covered by the BOE’s monetized debt purchases. In other words, despite the extraordinary size of the fiscal stimulus, the government still will not have to go to the markets to borrow.

There is less fiscal space in the eurozone. But the European Central Bank has already committed to net asset purchases of €120 billion ($130 billion), in addition to the €750 billion it announced on March 18. Its new Pandemic Emergency Purchase Program will even buy Greek sovereign bonds, something that was ruled out under previous asset-purchase programs following Greece’s debt default in 2015.

Interesting times for sure…

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