Tuesday, 19 October 2010

Let’s re-allocate the bloated monetary base into household pockets.

People are employed when other people wave their dollar bills or credit cards in the air and demand goods and services. It is tragic that this statement of the obvious needs to be made, but as I pointed out here, half the economics profession seems to have forgotten the above point.

The big obstacle to getting more dollars into household pockets is the dreaded deficit. That is, channelling money into household pockets can only be done by increasing the deficit, and Republicans and supposedly liberal Democrats (who largely accept conservative thinking when it comes to deficits, as Bill Mitchell has pointed out time and again) won’t wear any significant increase in the deficit because they think the latter involves increasing the national debt.

The latter idea is nonsense, of course, because deficit can perfectly well accumulate as additional monetary base instead of national debt. (Incidentally, politicians’ failure to get this point is a problem in the UK as much as the US, however there is less scope for stimulus in the UK just at the moment because inflation is around 3%. Thus the real potential benefits from politicians’ grasping the above point are to be had in the US rather than the UK, at the time of writing.)

However there is a solution of sorts to the political log jam which is thwarting economic progress. This solution derives from the fact that there is already a huge amount of monetary base out there doing little or nothing. It derives from quantitative easing. It is now widely accepted that QE is near useless: “pushing on string” to use the popular phrase.

So why not use the money which is already out there doing nothing, to actually DO something? In other words why not reverse QE and channel the money so obtained into household pockets?

When QE was first started, conservatives, like so many Pavlov dogs, started chanting “Weimar . . .Mugabwe”. Well they’ve been proved wrong on that one.

If the excess supply of monetary base already out there is simply re-allocated, they can’t possibly do their “Weimar . . . Mugabwe” chant. No increase in the monetary base is involved. And another beauty of this wheeze is that while the deficit goes up, no increase in the national debt ensues. So conservatives cannot cite their “national debt” argument. They’ll be stumped.

Afterthought (20th Oct). There is a vaguely similar suggestion by David Blanchflower: have the Fed buy the debt of individual states in the U.S. That’s kind of “the Fed doing fiscal policy”.

That rather falls for moral hazard: it encourages reckless behavior by states in the future. But the benefits might outweigh the costs.


  1. Inflation isn't 3% in the UK

    That includes the ongoing VAT hikes of about 1.5%, which is taxation. That destroys money, which is of course deflationary.

    There's no greater indication of a lack of understanding of money than including taxation in price increase statistics.

    Unless of course you're talking about RPI with the VAT hike taken off. In which case I'll shut up.

  2. Neil, good point. I’ve often wondered how much of our inflation is accounted for by 1, recent raw material price increases, 2, devaluation of the pound over the last two years, and 3, the VAT increase. But I haven’t seen any figures for this. So possibly the 3% is a gross overestimate.


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