I was intrigued by this Martin Wolf piece in the FT which discusses the need for helicopter drops to bolster the global economy. Señor Wolf writes:
If the fiscal authorities are unwilling to behave so sensibly — and the signs, alas, are that they are not — central banks are the only players. They could be given the power to send money, ideally in electronic form, to every adult citizen. Would this add to demand? Absolutely. Under existing monetary arrangements, it would also generate a permanent rise in the reserves of commercial banks at the central bank. The easy way to contain any long-term monetary effects would be to raise reserve requirements. These could then become a desirable feature of our unstable banking systems.
Some of you know where this is going…I am a stickler over operational realities because articles like this don’t discuss the important details about policy. For instance, the Federal Reserve has no legal mechanism by which it can actually implement a helicopter drop. As I’ve described in so much detail over the years, if it wants to credit a private bank account it does so currently by also debiting a private bank account. For example, during QE the Fed removes a T-Bond from the private sector and replaces it with a deposit. This technically increases the supply of super liquid deposits, but it also reduces the private sector supply of super safe T-Bonds. It’s an asset swap. No change in net worth, reduced aggregate income, therefore, in the long-run, QE is marginally deflationary.
Of course, Congress could give the Fed the ability to fire dollar bills into the private sector or even allow the non-bank public to open electronic accounts at the Fed. But we should be very clear about this – this is fiscal policy. So, I am not sure what Señor Wolf’s point is. He’s saying that the governments are too hesitant to implement more fiscal policy, but that these same governments might give the Central Bankers of the world a blank check? That sounds like the most unlikely outcome of all.
So, what’s my point? As I noted before – helicopter drops are fiscal policy. It’s time to stop pretending like Central Banks are going to be the entities through which any form of relevant policy gets implemented….