Pragmatic Capitalism

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“Helicopter Money”

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It looks like the tide is finally starting to turn. Bernanke paid a visit to Japan to advise their central banker on “helicopter money” adventures. And “Bond King” Gundlach thinks that central banks are going to “unexpectedly” quit QE and turn to “helicopter money” which is currently being defined as a central bank printing up money to give to consumers or government to spend.

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Posted by MachineGhost
Posted on 07/14/2016 4:40 AM
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And so it’s time to short the yen again……….. Then to be followed by the Euro, and then the USD.

These Central Bankers are truly desperate.

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Posted by Freedom
Answered on 07/14/2016 6:16 AM
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    This “Ask Me Anything” post reminded me that I wanted to bring up Alan Blinder’s WSJ July 7th opinion piece (“Those Money-Laden Helicopters Hovering on the Horizon”). Blinder’s skepticism that “helicopter money” is really even operationally feasible seemed to be pretty well thought out, but a few other parts of his article flashed bright red lights for me that suggested that Blinder continues to have some key things wrong about how our monetary system works.

    This was the first flashing light I saw: “In the real world, printing money means creating new bank reserves, which the Fed normally does by purchasing government bonds and paying for them with newly created bank reserves. Notice that this operation achieves what Friedman mused about: The government engages in deficit spending, but the Fed buys the debt, so the Treasury doesn’t have to to float (and pay interest on) more bonds.”

    Let’s pause for a moment. The Fed buys Treasury bonds, notes, and bills after they’re issued – after the private sector via the primary dealers already gobbled up the issues – right? Also, I didn’t think that the coupon payments on those Treasuries stopped just because they were held by the Fed. Let me know if I’m wrong on these two points.

    The next flashing red light: “Under normal conditions, banks would use their new reserves to make loans and expand the money supply. Interest rates would fall, giving the economy a boost. But when interest rates are stuck near zero and banks are flooded with idle reserves, the best guess is that any new reserves will just sit there – doing nothing for the economy.”

    Pausing again – it appears that Blinder wrongly believes that banks loan reserves to non-bank businesses and individuals. I also don’t go along with his notion that if actual private sector demand for loans was stronger, that would cause interest rates to fall. Seems to me that if the demand for loans was more robust – then interest rates could just as easily be going up. Isn’t that a basic demand/supply concept?

    Sorry I don’t have a link to the article – I only subscribe to the paper version of the WSJ.

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    Posted by Steve W
    Answered on 07/14/2016 3:45 PM
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      Here’s a link to the WSJ article Steve W. references:

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      Posted by JGF
      Answered on 07/14/2016 4:29 PM
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        Yeah this guy appears to believe in the money multiplier theory and perhaps unware that the Fed is paying interest on those “idle reserves” to keep them literally idle.

        Back in the day during the Monetarism experiment, the level and growth of the money supply was targeted by the Fed. If there no direct transmission mechanism between the Fed and the real economy, then it was all a red herring. But perceptions and expectations are a powerful thing. Look at the illusions unsupported by the facts in the case of gold.

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        Posted by MachineGhost
        Answered on 07/14/2016 9:32 PM
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          Helicopter money is really very simple. You just need to know some accounting and the institutional relationship between the fed and tsy.

          So, when the Tsy finances deficit spending it does so by creating a bond. This bond is a net financial asset for the private sector (meaning there is no corresponding pvt sector liability since it's held by the govt sector). You could say that it is created "by helicopter" and dropped into the private sector". They are essentially “printing” a t-bond just like a corporation does when they create a bond. A corporate bond is a net financial asset for the non-corporate sector assuming only the non-corporate sector holds the bonds. Whether the fed “finances” this bond is meaningless because the bond gets financed somehow someway. Meaning, whether I hold it or you hold it someone finances the bond. This is because, in a low inflation environment SOMEONE with a brain will rather hold a risk free interest bearing bond than cash. This is why the term monetization is so misleading. Monetization is only a useful concept in the case that the private sector refuses to finance the bond. In that case you probably have a hyperinflation occurring. That’s clearly not the case here. Okay, that’s simple enough, right?

          Now, if the Fed wants to create a net financial asset they can only do so (legally) by buying a non-financial asset or printing cash and shooting it out of helicopters. Of course, these options are both illegal at present. So the Fed is stuck being forced to buy other financial assets which results in the well known “asset swap” I’ve always described via QE and such. So they keep creating one type of asset (reserve) and swapping the private sector's holdings out for higher yielding t-bonds. That's not a recipe for inflation, it's actually a recipe for deflation because it reduces private sector aggregate incomes.

          So, the bottom line is, real helicopter money is illegal via the Fed. And it’s just fiscal policy anyhow so if people want helicopter money they should just be arguing for more fiscal.

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          Cullen Roche Posted by Cullen Roche
          Answered on 07/15/2016 12:36 PM