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Pragmatic Capitalism

Practical Views on Money, Finance & Life

Helicopter money, output gaps, and imports.

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In my thinking there are intrinsic problems with the idea of helicopter drops (not withstanding the politics) dependent on the size of the real output gap and what really amounts to an semi-infinite reservoir of imported goods. (friends who regularly travel to China on business are constantly impressed with the unused [and potential] output capacity). Even if all helicopter money went to spending (everyone had their desired level of savings which is clearly not true) it seems the impact on US real production (hence income) could be small, especially if the real output gap is small and not readily increased in the short term. I think the data strongly support direct government spending because it results in almost 1:1 US income changes. If the real output gap is small, then building roads and bridges, …, is inflationary with relatively small spending. This is really just a version of the Kalecki argument on full employment, with the change from increasing the real capital stock of weapons to increasing the real capital stock of public goods. But it seems that understanding of simple macro economics in the broad public makes anything but tax cuts (and then these are limited by the majority of Americans who think that the debt is something their children have to pay for their parents reckless spending). So what is the chance that Americans will ever become knowledgable? Or will the longstanding trend in the GDP growth rate continue indefinitely? The long term trend in GDP growth rate is correlated with Government direct spending and gross investment. That doesn’t prove causality, but one can make reasonable arguments that reduced gross investment (private sector has increased, but the combined slope is still negative.

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    Posted by John Daschbach
    Posted on 05/21/2016 1:36 PM
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    Here in Denver, low interest rates and high liquidity have resulted in a 22 percent increase in house prices in 2015. It has also brought a major expansion of Light Rail. How would we know that this additional liquidity would create jobs or beneficial assets? New assets who value would exceed the new debt(money), or would people pay down debt causing leakage?

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    Posted by alanb516
    Answered on 05/22/2016 10:00 PM
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      Hi John,

      Govt spending or heli money is hardly a cure all. No level of govt spending, for instance, can solve a problem like Venezuela has where they simply don’t produce enough domestic goods and services that people actually want. But I think with monetary policy so weak that fiscal just looks like the next best option. Will it solve world peace? Hell no. Will it marginally boost private sector balance sheets? Yes.

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      Cullen Roche Posted by Cullen Roche
      Answered on 05/24/2016 1:14 PM