Sunday, 30 September 2012

Is QE deflationary?

Warren Mosler has claimed for some time that it is.

His argument is that QE deprives the private sector of interest income. And to buttress his argument here, he cites a Fed paper by Seth Carpenter.

But there is nothing in that paper about the interest income point. Well I couldn’t find it.

Strikes me the flaw in Warren’s argument is that it’s the TREASURY that funds the interest on government debt, and it does so out of taxation. Thus when debt is QEd, there is as Warren rightly points out a reduced level of income flowing to the private sector. But seems to me there is a corresponding reduced flow of money from the private sector to government in the form of the above reduced taxation. I.e. the net effect is nil.

Warren Mosler deserves a Nobel Prize for his contributions to economics, but I think he is wrong on the above point.


P.S. (a few hours later). It seems from this freedom of information exchange of letters, that the Bank of England remits just HALF its profits to the Treasury. That means that when Gilts are QEd, about half the interest disappears into a black hole in the BoE. So the effect of QE is to withdraw monetary base from the private sector.

If that effect outweighs the stimulatory effects of QE, then QE in the U.K. will indeed be deflationary. In contrast, in the U.S., it looks like ALL PROFITS made by the Fed are remitted to the U.S.Treasury.


Friday, 28 September 2012

Why do commercial banks react to changes in central bank base rates?

Darned if I know.
The amount of reserves that commercial banks need to hold as a proportion of their total assets or liabilities varies from country to country. In some countries (e.g. Canada) there is no minimum reserve requirement. In the latter sort of countries, commercial banks’ only reason for holding reserves is to enable them to settle up amongst themselves.
As to what reserves are relative to M4 or commercial bank lending, this has varied over the last five years from a ratio of about 1:10 to about 1:20 in the UK.
Now if a commercial bank needs £1 of reserves for every £20 lent, the fact of it having to pay an extra percent or two to obtain those reserves will have a negligible effect on the rate it charges for lending the £20.
So why do changes in central bank base rates have any effect on commercial bank lending?
Anyone know?

Tuesday, 25 September 2012

George Selgin explains how private banks steal the right to create money from government.

In an economy where just government and central bank create money, private banks can easily steal the right to create money from government. Irving Fisher called this the “usurpation of government’s prerogative”*.

George Selgin (ironically a leading advocate of fractional reserve) explains how private banks do this. His explanation, which I agree with, is that where fractional reserve is introduced to a full reserve economy, the result is a temporary bout of excess inflation, which reduces the value of government / central bank produced money to near nothing, at which point the excess inflation stops. And that’s the end of the story according to Selgin. I’ll argue below that the excess inflation might continue, absent government intervention to stop it.

Selgin’s explanation starts with a hypothetical “monetary base only” economy where the base consists of gold. Fractional reserve is introduced, and that enables banks to do what goldsmiths did in England in the 1700s: lend out receipts for gold not backed by real gold. Those receipts are of course used as money.  That is a profitable business and tends to cause inflation.

 Under a real world gold based currency (as existed for example in England in the 1800s) serious inflation is prevented by the fact that market forces won’t allow the price of gold to vary to any huge extent relative to other goods. (The price of bread in England at the end of the 1800s was the same as at the beginning).

Selgin gets round the latter awkward fact in his hypothetical economy by assuming a constant demand for gold regardless of its price relative to other goods.

That is a bit unrealistic, though it doesn’t invalidate his basic point. It would have been better in the hypothetical economy to have had monetary base in the form of fiat currency: the value of that can easily be eroded by inflation. So in the rest of this article, I’ll assume  a fiat currency: after all, that is the type of currency in all major economies nowadays.

So inflation rises in the hypothetical economy. However, the inflationary episode comes to an end according to Selgin when the real value of the monetary base has been reduced to a level just sufficient to enable commercial banks to settle up with each other.

I don’t agree. Reason is that private banks don’t actually need any reserves at all in order to settle up. Certainly the fact of having reserves at the central bank and having a central bank provided “settling up system” is CONVENIENT. But absent that system, banks could easily set up their own settling up system.

As to what they’d use for settling up, any type of asset would do: shares, bonds or bank branch buildings. Or in extremis, a badly indebted bank could hand over ownership of its head office building to creditor banks. Ultimately the debtor bank’s assets might decline to a level where the most sensible option would be for creditor bank(s) to take over the debtor bank.

The latter system would not involve so much INSTANT settling up at the end of every day. But that wouldn’t matter as long as banks trusted each other. That is “unsettled up debts” could be left in place for weeks or months, and in many cases those debts would be netted off against debts owed by creditor banks to debtor banks.  Indeed, this sort of “not settling up immediately” happens currently on a large scale in that there is a huge amount of inter-bank lending.

Anyway, Selgin then claims implicitly that there are no further effects after the temporary burst in inflation. I suggest THERE ARE further possible effects: possibly leading to a permanent rise in inflation.

Individual banks versus the banking system.

It is important to note that the constraints facing an INDIVIDUIAL BANK are very different to those facing the private banking system (PBS) as a whole. Selgin rightly refers to these differences over and again in his book, “The Theory of Free Banking”. In particular, an INDIVIDUAL BANK cannot expand the amount it lends RELATIVE TO the rate at which other banks are expanding without experiencing a drain on its reserves.

However, I’ll assume to keep things simple that given plenty of creditworthy borrowers, EVERY BANK expands at about the same rate. So the argument below is just about the PBS.

Interest paid to depositors.

Strictly speaking, if every bank is equally efficient and expands at the same rate, there is no reason for banks to pay any interest to depositors. That is, the only reason banks pay interest is that if they lose depositors to other banks, they also lose reserves (or “branch buildings”). And if all banks are equally efficient and expand at the same rate, there is no reason for depositors to move money from one bank to another.

But I’ll assume that banks pay some finite rate of interest to depositors (which might be zero or might be more than zero).

Anyway . . fractional reserve is introduced and inflation reduces the monetary base to a small portion of the total money supply.

There are then three possibilities. 1. The desire by depositors to save cash produces enough cash to supply all credit worthy borrowers with just the funds they need at the prevailing rate of interest. That’s an equilibrium.  2, the amount depositors want to save exceeds the amount borrowers want to borrow, and 3, the latter exceeds the former. I’ll take those three in turn.

Re No.1, that has the merit, to repeat, of being an equilibrium.

2. If the amount that credit worthy borrowers want to borrow is LESS THAN the amount that savers voluntarily save at prevailing rate of interest, the effect would be deflationary. Government would have to print and spend money into the economy. But that’s not a big problem. It would just mean that the monetary base would be larger than the amount banks needed to settle up between themselves (a situation that prevails in the real world at the time of writing).

An alternative, which produces the same end result, is that scenario No.2 is operative DURING Selgin’s temporary bout of inflation. In that case, the bout of inflation would not last long enough for the base to decline to the minimum level that banks need to settle up).

3. If the total that creditworthy borrowers want to borrow EXCEEDS the amount that savers voluntarily want to save, PBS will simply lend money into existence to meet borrower’s requirements. But that will result in depositors having more money than they want (because “loans create deposits” as the saying goes). So depositors will spend the excess, which will be inflationary. But that in turn means the REAL VALUE of loans by banks to borrowers declines. And assuming that the value of loans needs to stay constant in real terms, then banks will lend even more money into existence. Now that’s an inflationary spiral: it’s a feed-back loop.

To summarise No.3, where the amount that non-bank private sector entities want to borrow exceeds the amount of cash and deposits at banks that savers / depositors want to hold, an inflationary spiral takes hold.

As for evidence that the latter phenomenon actually occurs, the Chinese government at various times in recent years has been concerned at the inflationary effects of excessive bank lending. And in Britain there have been numerous occasions since WWII on which government has clamped down on lending.

And finally, if the above argument is correct (which is a big “if”), having the central bank raise interest rates will not curtail lending. That is, to the extent that commercial banks can by-pass the central bank’s settling up system, commercial banks just aren’t bothered about what the central bank pays for borrowing back it’s own money: PBS can just fire ahead and lend money into existence willy nilly.

I.e. in the above excess inflation scenario, it is QUANTITATIVE controls on lending that are required, rather than PRICE CONTROLS (exactly what the Chinese have done on one or two occasions in recent years).

Indeed since the desired effect is the opposite of “quantitative easing”, I’d like to introduce a new phrase to the English language: “quantitative squeezing”.


*  “100% Money and the Public Debt”, published by Michael Shemmann, p.18.

The relevant passage in the above work of Irving Fisher’s reads, “At present our nation’s chief money is at the mercy of the mob rules of 15,000 banks. These are tantamount of 15,000 private mints independently creating and destroying the nation’s money every day, while the Government looks helplessly on at this usurpation of its prerogative.”

Monday, 24 September 2012

Britain’s former finance minister, Norman Lamont, doesn’t understand finance.

In the Financial Times today, he tries to argue against stimulus.

He actually makes the same mistake as that made by Messers Portes and Van Reenen which I pointed out recently here.

Lamont says, “Today’s Keynsians argue that given a sufficient stimulus, the economy will jump-start self-sustaining growth. One should always be wary of mechanical analogies in economics. There is a gap in the Keynsian analysis. How is the new burst of growth going to be sustained when at some point, the stimulus will be reversed….?”

First, you’d think that as a former finance minister he’d have discovered that stimulus just isn’t reversed and never has been in the sense that the monetary base and national debt over the very long term have constantly expanded in nominal terms, or “money unit” terms.

Occasional reversals have been needed, and will doubtless be needed in the future when an economy overheats. But that’s the only valid reason for “reversing”. Moreover, when that reversal is effected, it does NOT, REPEAT NOT stop economic growth being “sustained” to use Lamont’s phraseology.

All it does (to repeat) is to stop the economy overheating: it stops inflation getting out of hand. Indeed, in that excess inflation is positively damaging and HINDERS economic growth, the “reversal” actually PROMOTES economic growth: an irony that seems to be beyond the comprehension of Britain’s leading financial experts.

P.S. (a few minutes later).
Similar nonsense is being promulgated by Messers Taylor and Gramm in the U.S. See the first paragraph of Paul Krugman’s article here. .

Sunday, 23 September 2012

Hot air from Jonathan Portes and John Van Reenen on consolidation.

To consolidate or not to consolidate, that is the question – the question that troubles those who don’t understand consolidation.

This Financial Times article by the above two advocates a middle of the road policy as between two extremes: fast consolidation which spells severe austerity right now and the other extreme, slow consolidation which allegedly means a very high national debt.

All “sensible” middle of the road people will applaud the above sensible, middle of the road policy: mainly because they’ve no grasp of the subject, and if you want to sound sensible and reasonable, and have no idea what you’re talking about, then you can’t go wrong with a “mid-way between two extremes” policy. If you’re a politician, that’s bound to win votes.

Two phrases in the article illustrate the authors’ non-grasp of the subject.

First, they say “The modelling confirms that doing nothing was not an option; our “no fiscal consolidation” scenario leads to unsustainable debt ratios. So some pain was inevitable.” The “modelling” refers to the NIESR’S super duper computer model (paid for by you, the taxpayer): not to mention the £2m or so of taxpayer’s money that the NIESR spends on staff salaries, etc.

Their other revealing sentence is their last, which reads, “This analysis shows that the economic pain resulting from fiscal consolidation, while unavoidable, could have been substantially reduced by a sensible application of basic macroeconomic principles.”

Funding the debt with monetary base.

The first mistake comes in the first sentence where the authors claim that slow consolidation leads to elevated levels of national debt. As Keynes, Milton Friedman and no doubt dozens of other economists pointed out, a deficit can be funded EITHER BY increased debt OR BY an increased monetary base. No doubt the super duper advanced technology NIESR computer model reached the conclusion that deficits lead to increased debt because that was the (false) assumption fed into it.

In fact the deficits of the last year or two ACTUALLY HAVE BEEN funded by an increased monetary base in that most of the increased debt has been QEd. Of course that process leaves billions worth of so called debt in the hands of the central bank. But that debt might just as well be torn up: it’s meaningless. It’s a debt owed by the Treasury to the central bank. I.e. it’s a debt owed by one arm of the state to another.

Pain is not inevitable.

Next, let’s assume that a deficit (contrary to what Keynes and Milton Friedman told us) can only be funded by increased debt. And let’s take the idea that “some pain was inevitable” because “no fiscal consolidation leads to an unsustainable debt ratio”.

The idea that Britain or America’s debt is “unsustainable” even if it gets substantially larger is an odd claim given that the REAL RATE OF INTEREST (i.e. the inflation adjusted rate) is around ZERO! I’m happy to borrow a billion any time at a zero real rate of interest.

Of course it’s possible the interest rate suddenly rises, but that would have no effect on the interest paid on debt with some time to go before maturity. In contrast, there is debt reaching maturity and due for roll-over, and there might seem to be a problem there.

The apparent problem is this. If the debt is rolled over, the country has to pay a substantial amount of interest. But if it’s not rolled over, and we just print money and pay off debt holders, the effect is stimulatory - even inflationary.

Hang on . . . . did I say “stimulatory”? Shock, horror. Isn’t stimulus exactly what’s needed in a recession?

Of course the stimulus might be TOO MUCH. But that’s not a problem: the relevant government just needs to raise taxes (or cut public spending) by whatever is needed to counteract the excess stimulus.

At this point, the massed ranks of economic illiterates will chirp up and claim that increased taxes or public spending cuts equals the “pain” to which Portes and Van Reenen referred. My answer is “not true” (though I’d prefer to use stronger language.

The purpose of those taxes / spending cuts would simply be to rein in demand to a level that can be accommodated. Put another way, the purpose is to prevent excess inflation. In short (and ironically) those taxes far from making anyone WORSE OFF would actually make them BETTER OFF in that excess inflation involves significant costs or damage.

Or put it yet another way, to print money and increase public spending when an economy is at capacity won’t result in any increased public spending in REAL TERMS. It just leads to inflation.


Government should AT ALL TIMES keep the deficit at the maximum level that is consistent with acceptable inflation. As to the actual size deficit or debt: ignore them.

In fact the basic point in the above paragraphs comes to the same thing as a short phrase enunciated by Keynes: “look after unemployment and the budget will look after itself”. But then as already pointed out, Portes and Van Reenen don’t seem to have a full grasp of Keynes’s ideas. .

Saturday, 22 September 2012

The crunch was caused by using interest rates as a regulatory tool.

Or at least that’s part of the explanation, and for the following reasons.

There WASN’T any sort of uncontrolled boom prior to the crunch, at least in the sense that inflation was not badly out of control. However, people WERE shifting the resources at their disposal towards property speculation and away from other areas. House prices rose, while the price of other stuff fell (or rose less quickly than it would otherwise have risen). Net effect: no serious inflation.

A rise in interest rates would have choked off the speculation at least to some extent, but that didn’t happen because central banks use interest rate adjustments to control aggregate demand and inflation, and CBs didn’t think inflation merited an interest rate rise.

In contrast, aggregate demand and inflation could be controlled simply by adjusting the rate at which the government / central bank machine creates new money and spends it into the economy (and does the reverse when appropriate: withdraws money and “unprints it”). As to interest rates, they’d be left to look after themselves – and in particular, given increased demand for loans for property speculation, those rates would tend to rise.

MMT is right again.

Now what do you know? The above policy was advocated by Abba Lerner and (I think) most adherents to Modern Monetary Theory. It’s also advocated by Positive Mloney, Prof Richard Werner, and the New Economics Foundation. .

Friday, 21 September 2012

Brad DeLong’s flawed criticisms of full reserve banking.

Brad DeLong has penned an article on Austrians’ objections to fractional reserve banking. I have plenty of respect for DeLong, but he is out of his depth on this particular subject. His second paragraph reads:

“I mean, it has always been a peculiarity of that (Austrian) school of thought that it praises markets and opposes government intervention — but that at the same time it demands that the government step in to prevent the free market from providing a certain kind of financial service. As I understand it, the intellectual trick here is to convince oneself that fractional reserve banking, in which banks don’t keep 100 percent of deposits in a vault, is somehow an artificial creation of the government.”

First, it is not true to claim there is any self-contradiction in advocating free markets at the same times as advocating various interventions in the market. Nearly EVERY ADVOCATE of the free market ALSO advocates numerous government interventions , e.g. intervention in some or all of the following forms: intervention in the trade in firearms, and dangerous or addictive drugs, taxes on alcohol, provision of free education for kids (and/or university students), provision of free healthcare and so on.

Second, the idea that fractional reserve is an “artificial creation of the government” is nonsense, and I’ve never seen that idea put by Austrians or any other advocate of full reserve. It’s obvious from the history of banking, particularly prior to about 1850 when there was very much a free market in banking, that fractional reserve arises automatically in a free market. 

Money market funds.

DeLong continues: “But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund — and surely the Austrians don’t want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money — you can even write checks on them — created out of thin air by financial institutions, with very few pieces of green paper behind them.”

The answer to those points by DeLong are thus.

The purpose of full reserve is to prevent the creation of money by private banks: that is to make money creation the sole preserve of government and central bank. Private money creation takes place (to over simplify a bit) when someone deposits $X in a bank current / “checking” account (or short term deposit account,) and the bank then lends the $X on to a borrower. In that scenario, both depositor and borrower have access to $X. That is, $X has been turned into $2X.

Now MMFs just don’t do that: they simply take money off depositors and invest the money in very safe investments, like short term government debt. No money creation takes place. So under a full reserve system, MMFs would simply be left to get on with their usual business.

Indeed, Laurence Kotlikoff (an advocate of full reserve) SPECIFICALLY ADVOCATES the setting up of a variety of mutual funds, including money market funds, to take over some of the functions of banks.


Next, let’s deal with the question posed by DeLong: “surely the Austrians don’t want to ban financial intermediation (or do they?).”

The quick answer is that pretty well all intermediation by banks ceases under full reserve, though that depends on EXACTLY what you mean by a “bank” and by the word “intermediation”. And that curtailment of intermediation is for very good reasons, as follows. The reasons are a little complicated. But read on if you’re interested.

A bank is an institution which accepts deposits and promises to return the money to depositors (maybe plus some interest and maybe less bank charges). Now if a bank takes any risk whatever with that money the possibility arises of it NOT BEING ABLE to repay depositors’ money. And in fact is that history is JUST LITTERED with examples of banks doing just that: going bust and failing to return depositors’ money.

In short, the reality is that banks regularly cheat depositors unless taxpayers back-stop the above semi-fraudulent promise that banks make to their depositors. But that back-stopping amounts to a subsidy, and banks are supposed to be COMMERCIALLY VIABLE.

The actual size of this subsidy was estimated by Andrew Haldane of the Bank of England to be several times larger than banks’ annual profits over the last decade or so. In short, banking in its present is a PATHETIC FARCE.


Banks in their present form are not the free market, capitalist institutions that Brad DeLong seems to think they are. Banks are actually parasitic organisations. They are part of the “socialism for the rich” system.

So what’s the solution? Well it’s easy, and as follows. First, banks (or any institution that promises to return money to depositors dollar for dollar) should be forbidden from taking any risk whatever with that money. Second, there are the commercial and risky activities that banks currently engage in, and these activities are for the most part perfectly acceptable: there is nothing inherently wrong with commercial activity. Commercial activity is almost by definition a risk. But the risk should be carried by people who have clearly and consciously accepted risk: that’s people who are, or who are in the nature of equity or bond holders rather than depositors.

To summarise so far, if a depositor wants 100% safety, NO RISK should be taken with their money. And that in turn means they get no interest (though they CAN HAVE instant access). As to depositors who want interest on their money, i.e. who want their bank to lend on or invest their money, they’ll just have to accept that their desire to act in a commercial manner involves risk: if the loans or investments their money is put into go bad, they take a hair cut.

Would full reserve outlaw all forms of private money creation?

Next, DeLong says, “One of the key lessons of the 2008 crisis was precisely that banks are defined by what they do, not by what they look like, and there are a whole range of financial arrangements that in economic terms act a lot like fractional reserve banking. So would a Ron Paul regulatory regime have teams of “honest money” inquisitors fanning across the landscape, chasing and closing down anyone illegitimately creating claims that might compete with gold and silver? How is this supposed to work?”

The answer is thus.

First, the more clued up advocates of full reserve have actually tumbled to the fact that whether an institution has the word “Bank” emblazoned over its front door has nothing to do with whether it acts like a bank or creates money.

Second, the above clued up advocates have also tumbled to the fact that there are an almost limitless number of institutions and indeed individual people who can get in on the money creation process. For example if I give Joe Bloggs an uncrossed or negotiable cheque, Joe can endorse the cheque and use it in payment for goods or services he wants to purchase. And the cheque can in theory pass through any number of hands.

The cheque is then a form of money.

But it’s a very awkward and inefficient form of money. Personally I’ve never in my entire life been offered a negotiable cheque in payment for anything and I probably wouldn’t accept one if it WERE OFFERED. Negotiable cheques are never going to compete to any serious extent with a properly organised monetary system, full or fractional reserve. 

Size pays.

Next, when it comes to money creation, big institutions have a huge advantage over smaller ones. For example, about 90% of retail outlets accept plastic cards issued by well-known institutions like Visa or American Express. But you try foisting a card on a retail outlet issued by an organisation no one has ever heard of: you’ll have problems.

Now if the only institutions that can do money creation in any serious way have to have a turnover of at least say $10m a year (and very few small banks have a turnover that small), they can hardly avoid being noticed by the authorities. If you are a self-employed plumber with a turnover of just $50,000 a year trying to avoid being noticed by the income tax authorities, you probably won’t get away with it for long: never mind $10m a year.

Thus DeLong’s point about “teams of “honest money” inquisitors fanning across the landscape” is an argument that is easily rebutted: 99% of private money creation is implemented by institutions which cannot possibly hide from the authorities. “Fanning across the landscape” is totally unnecessary. 

Is full reserve deflationary?

A common objection to full reserve (at least in the above form) is that it would curtail lending, which would have a deflationary effect or hinder economic growth. Well the simple answer to that (as indeed Kotlikoff and other advocates of full reserve like Positive Money) have pointed out, is that the government / central bank machine can perfectly well create and spend extra money into the economy to give enough stimulus to counteract the above deflationary effect.

Indeed, the above deflationary effect is actually the OPPOSITE EFFECT to that which would occur if a country were to do a switch in the opposite direction from that advocated above: i.e. switch from full to fractional reserve, as pointed out by George Selgin. As Selgin rightly points out, switching FROM full reserve TO fractional reserve would have a temporary INFLATIONARY EFFECT.


Austrians are not the smartest people on planet Earth and they make plenty of mistakes in their advocacy of full reserve. But when it comes to the more clued up advocates of full reserve (like me?????), that’s a tougher nut to crack. And if DeLong’s article is any guide, he has a long way to go before he cracks it. .

Monday, 17 September 2012

Edward Harrison discovers that Job Guarantee is a farce.

Edward Harrison (who runs the Credit Writedowns site) made an amazing observation while walking down a street recently. He was (to quote) “walking down the street with my wife and son when we noticed some serious (but unnecessary and annoying) street work that the local county had done. I went ballistic, complaining that, on the one hand, the local elementary school right across the street had been shut down because the building was ‘not up to code’, yet on the other hand, the county was doing these ridiculous and unnecessary street and sidewalk ‘improvements’. It immediately hit me that one could claim that these improvements were keeping people employed and aiding the economy. But, my viscerally negative reaction tells you that such a claim would be considered false by many taxpayers. It’s through these eyes that I view the debate on the job guarantee.”

Well done Edward Harrison. He has discovered by actual observation a point I’ve been making for 20 years, which is that what might be called “specially set up” make work schemes or “job creation schemes” like the WPA are inherently inefficient compared to jobs with regular employers (public or private).

In other words, given say an unemployed teacher, it’s much better to subsidise them into work in a school, then have them doing “unnecessary street and sidewalk improvements”, to quote Edward.

Unfortunately the above point seems to be beyond the comprehension of most of those discussing make work schemes / Job Guarantee / WPA. As to some of the more abstruse or complicated theory behind such schemes, there is not the faintest chance of the human race ever understanding it.


Thursday, 13 September 2012

Bank of England’s David Miles can’t see the difference between QE and helicopter drops.

Cocooned as they are in their central London offices, Bank of England officials concentrate on what they’ve been told to concentrate on: monetary policy, inflation and the like. More important and fundamental economic considerations like output per head tend to elude them.

And so it is with this speech by David Miles, External Member of the Monetary Policy Committee of the Bank of England. He claims there is little or no difference between QE and helidrops.

Well the difference is blindingly obvious to the average family. That is, the average British family can see the difference between being given say £1,000 and alternatively having that money channelled to some pension fund which invests the money in the bonds of some far-away country, which is a typical example of what happens to QE money. But that’s arguably a cheap shot at QE. So let’s get serious.

He says, “So the key difference between the helicopter drops of money (which is money financed fiscal policy) and conventional QE is that, with the latter, the terms on which the asset purchases by the central bank are made are flexible and sensitive to inflation pressures in the economy, while with money financing they might not be.”

Nonsense. There is absolutely no reason to think that “the terms on which asset purchases . . .are made” are any more “flexible” than the terms on which helidrops might be made. That is, a central bank when deciding if stimulus is in order would take exactly the same care (or lack of care) to ensure that stimulus really was was warranted regardless of whether it was thinking of effecting stimulus via QE or via helidrops. There is absolutely no reason to suppose a central bank would take less (or more) care in one scenario rather than the other.

A few sentences later he says, “Why would irreversible helicopter drops be superior, when they might ultimately generate inflation pressures that would be unwelcomed? Why not prefer a more flexible policy where asset purchases can be adapted if inflation pressures pick up and the demand stimulus they generate no longer brings forth more output but instead just creates higher prices?”

“Irreversible helicopter drops”??? Now he has slipped from claiming that helidrops are less “flexible” to claiming they are totally “irreversible”. Well that will be news to Britain’s finance ministers past and present. That is, when those finance ministers have decided to raise taxes and withdraw money from the private sector, taxes have (lo and behold) actually risen. And money has (lo and behold) actually been extracted from the private sector.


However Miles is not 100% wrong: the levers that control monetary policy can be pulled more quickly than the levers controlling fiscal policy. E.g. a central bank can raise its base rate within 24 hours of deciding to do so. In contrast, altering a sales tax or income tax may take a month or two. But that difference is not very important because the TOTAL LAG between the decision to implement a change in monetary or fiscal policy and that change actually having an effect is in the order of a year or more.

QE is distortionary.

However the really fundamental flaw in Miles’s argument, and indeed the fundamental weakness in QE (and monetary policy in general) is that it involves boosting an economy via just one section of the economy. That is, the aim is to stimulate borrowing and investment. A more cack-handed and incompetent form of stimulus is difficult to imagine.

Why not stimulate an economy just via people with red and blond hair? There is no question but that there’d be a trickle-down effect that would benefit those with brown and black hair. Why not stimulate the British economy by pumping loads of money into Yorkshire: there is no question but that ultimately the rest of the country would benefit from free spending Yorkshire folk with £20 notes falling out of their back pockets.

In short, the beauty of helidrops is that they are NON-DIRECTIONAL or NON-DISTORTIONARY. They assist achieving the FUNDAMENTAL OBJECTIVE of economic activity: supplying Mr and Mrs Average with what Mr & Mrs Average want.

But of course our London based elite, both at the Bank of England and Westminster view Mr & Mrs Average with a degree of distain which is matched only by the distain in which Mr & Mrs Average hold the elite.

Political considerations.

But helidrops are not entirely problem-free. One problem (not spotted by Miles as far as I can see) is that reversing helidrops is politically more difficult than reversing QE. That is reversing helidrops involves tax increases and/or public spending cuts. And the two latter tend to produce objections, especially from the loud-mouthed buffoons at the top of our trade union movement.

The only possible solution to that is to explain to union leaders before implementing a helidrop what is going on, and pointing out that the drop might need to be reversed. And if that doesn’t work, then nothing will. If a substantial portion of a country wants to behave like buffoons, then the only solution is to give them what they’ve asked for: buffoon type policies like QE.