tag:blogger.com,1999:blog-5908830827135060852.post1719374009996563599..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: The Political Problems with Helicopter MoneyBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-5908830827135060852.post-80374042663122243132016-10-11T22:23:56.582-04:002016-10-11T22:23:56.582-04:00Regarding the identity for a consolidated central ...Regarding the identity for a consolidated central bank and Treasury, the Federal Reserve says the amount of currency in circulation depends on the public demand for currency:<br /><br />https://www.federalreserve.gov/paymentsystems/coin_about.htm<br /><br />Federal Reserve notes are liabilities on the Federal Reserve's balance sheet. The asset counterpart to these liabilities is typically U.S. Treasury securities, mortgage-backed securities, and other assets. The Federal Reserve receives interest earnings from the assets that collateralize Federal Reserve notes. The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. When a depository institution orders and deposits currency from its servicing Reserve Bank, the institution’s account balance is adjusted accordingly.<br /><br />Coin held by the Reserve Banks is an asset on its balance sheet and the Reserve Banks buy coin from the Mint at face value. When a depository institution orders and deposits coin from its servicing Reserve Bank, the institution's account balance is adjusted accordingly.<br /><br />In a growth economy the federal government sells Treasuries in the first instance to cover the deficit. This permits the central bank to purchase Treasuries from nonbanks if the public withdraws currency from the aggregate bank. Thus the public decides whether it wants to hold currency or interest bearing government debt. <br /><br />Helicopter money used to cover a deficit may cause problems for the central bank if this currency is deposited into the aggregate bank and presented to the central bank to purchase more reserves. The central bank would swap out currency liabilities for reserves, however, it would not have assets on its balance sheet to sell to banks or nonbanks to drain the excess reserves.<br /><br />So the central bank might be forced to depend on the Treasury to issue debt to drain reserves if the deficit is covered initially by printing currency rather than by printing (issuing from thin air) a new Treasury security.Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-27326136405598937952016-10-11T14:43:50.569-04:002016-10-11T14:43:50.569-04:00To understand why spending currency is not a solut...To understand why spending currency is not a solution to any modern economic problem, first consolidate the central bank and federal Treasury functions into a Sovereign, then write the following identity for the Sovereign balance sheet position:<br /><br />N = K + F - C - R - B<br /><br />N, net worth<br />K, non-financial assets<br />F, financial assets<br />C, currency liabilities<br />R, reserve liabilities<br />B, Treasury securities<br /><br />Traditional high powered money would be created by a debit (increase) to financial assets F and a credit (increase) to reserves R.<br /><br />Balanced budget debt would be created by a debit (increase) to either non-financial assets K or financial assets F and a credit (increase) to Treasury securities B.<br /><br />Helicopter money would be spent via a debit (decrease) to net worth and a credit (increase) to currency. The net worth of the central bank or of the consolidated government would decrease for HM.<br /><br />Helicopter debt would be spent via a debit (decrease) to net worth and a credit (increase) to Treasury securities. The net worth of the government would decrease for helicopter debt.<br /><br />Inflationary and deflationary impacts depend on the prevailing conditions in the economy and the size of the stimulus, not on whether the government issues helicopter money or helicopter debt! During a deflation the consolidated government should transfer money to those who will spend to generate inflation, and should pay interest on its debt to those who want more savings, because people who produce do so in the expectation of profit and growth of savings. During excessive inflation the consolidated government must either reduce its deficit spending or jack up short term interest rates to such a high level that a recession is induced via the leveraged financial intermediaries. This would wipe out some credit formation in a bankruptcy event and force the more aggressive financial intermediaries into bankruptcy based on the concept of "interest rate risk."Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-55695190988549780452016-10-10T12:03:04.737-04:002016-10-10T12:03:04.737-04:00Ralph didn't you undermine your own initial is...Ralph didn't you undermine your own initial issue, if you want the interest rate left at 0%? You started with:<br /><br />"that first involves printing money while the second involves printing debt on which interest is paid"<br /><br />In the case of zero interest, they would have that on bonds as well.gusnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-81744891476122286762016-10-10T11:52:38.741-04:002016-10-10T11:52:38.741-04:00This is the problem with "helicopter money&qu...This is the problem with "helicopter money": everyone projects their own meaning onto the term.<br /><br />I am using what I believe is a standard definition of HM: the central bank is given *new powers*, that to conduct fiscal policy.<br /><br />You (and Mosler, etc.) are advocating *taking away* central bank powers - the ability to set interest rates; they are locked at zero by legislative fiat. Needless to say, that is a completely different proposal than I am discussing here, and so my comments would not apply to your proposals.<br /><br />My comment about "lying" was too broad, what I should have written was "white lie." But once again, that is not applicable to what you are suggesting.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-52312755695223518262016-10-10T02:36:56.237-04:002016-10-10T02:36:56.237-04:00Who said anything about "excess reserves"...Who said anything about "excess reserves"? I certainly don't advocate the issue of so much base money (aka reserves) that the state then has to thwart the excess demand that would otherwise arise by raising interest rates or paying interest on reserves. I.e. I go along with the policy advocated by Milton Friedman and Warren Mosler: issue enough base money to keep the economy at full employment, while not paying any interest on state liabilities.<br /><br />Coincidentally Stephanie Kelton did a couple of tweets backing that "zero interest" idea recently. See:<br /><br />http://ralphanomics.blogspot.co.uk/2016/10/are-interest-rates-artificially-low.html<br /><br />Re "lying to the electorate" I don't see what lies I'm telling.<br /><br />Getting back to your original article, You say “no politician is going to hold them (central banks) to account for small deviations below the inflation target..”. True enough. But that ignores a much more important point, namely what was the shortfall in GDP attributable to conventional policies after the 2007/8 crisis? Looks like the shortfall was in the 5% - 10% range which is serious. No one knows how much of that problem helicopter money would have solved, but it could hardly have done worse than pathetically slow recovery we've actually had.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-30217728778933595412016-10-09T17:20:15.660-04:002016-10-09T17:20:15.660-04:00The interest cost is the same thing (within spread...The interest cost is the same thing (within spread issues). If you create excess reserves, the interest rate paid on those reserves will equal the t-bill rate, and so the net cost to the consolidated government is the same. If one argues that it is different that the central bank is paying it, and not the Treasury, you are insinuating that politicians are unable to read simulations that will show them there is no net impact (since central bank dividends are reduced).<br /><br />Sure, you can raise reserve requirements to convert excess reserves to required reserves, but that could be done in the absence of helicopter money. And that is a bad idea, as I discussed elsewhere.<br /><br />As for the R&R campaign against debt, the only way to defeat stupidity is by being smart. Lying to the electorate about helicopter money is not a great way to defuse lies about government debt. Some people might disagree with the usefulness of white lies, but I am a prairie populist, and in my view, nothing good ever came out of lying to the citizenry. They will figure it out.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-22149091608742958202016-10-09T15:47:01.143-04:002016-10-09T15:47:01.143-04:00Brian, Under the heading "overt money financ...Brian, Under the heading "overt money finance" you claim "there is no advantage to “Overt Monetary Financing” versus “Standard Government Finance.” because the chance of default in both cases is zero.<br /><br />However the chance of default is not the only difference between the two: there's also the fact that first involves printing money while the second involves printing debt on which interest is paid. Since the object of the exercise is stimulus, and since government borrowing as such has the opposite effect (i.e. it's deflationary) strikes me that OMF is better: what's the point of doing something deflationary when the object of the exercise is the opposite? Completely mad.<br /><br />Of course I’m aware that if you tell politicians and the academics who worry about the debt, e.g. Rogoff and Reinhart, that debt problems can be removed by simply printing money, a proportion of them will then start chanting “inflation”. However, the fact is that dummie Rogoff and dummie Reinhart haven’t actually kicked up anywhere near the fuss about helicopter money or its possible inflationary consequences, as compared to the fuss they kick up about debt. Indeed, I haven’t actually come across their saying anything AT ALL about the possible inflationary consequences of helicopter money.<br /> <br /><br />Your final paragraph claims “…the belief that central banks need to have the power to enact fiscal policy because elected officials are structurally averse to deficit spending has to be one of the most evidence-free political beliefs that I have come across in my lifetime.”<br /><br />Personally I find myself buried by an absolute avalanche of evidence. There is so much that I don’t know where to start. Presumably you’ve heard about Kenneth Rogoff and Carmen Reinhart’s never ending campaign against government debt? Aren’t you aware that about 95% of politicians on both sides the Atlantic have fallen for this nonsense and are worried about “the debt”. Haven’t you heard about Simon Wren-Lewis’s correct observation that the media has also fallen for the latter debt nonsense? He calls it “macro-media”.<br /><br />As it happens, SW-L did a post today on that topic and I left a comment after it.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.com