A brief reply to Bank Underground

Fergus Cumming at the Bank of England has written this blog on the subject of helicopter drops.

It is encouraging that the Bank is discussing the matter, but unfortunately the references are too narrow and the arguments are weak. The debate has moved on considerably since this discussion on Vox, and the version of helicopter drops presented is a straw man. Fergus fails to address the really substantive analytical and policy questions.

I will summarize briefly where I take issue. Rather than explain each point at length, I will provide links to blogs which have already done so:

1) The smart version of “helicopter drops” involves equal cash transfers from the central bank to the household sector subject to its inflation target. The reason for having this tool is precisely the ineffectiveness of existing tools. This policy does not require a “joint operation” by fiscal and monetary authorities, as Fergus suggests, any more than the current framework is a joint operation on the basis that parliament has legislated an inflation target. Simon Wren-Lewis, Mark Blyth and I have outlined how to do it here. Parliament legislates the means of the transfer, and the Bank determines when and how much – just as it does with interest rates.[1]

2) The distinction between monetary and fiscal policy deserves more subtle analysis than is presented in the blog. Most of the time, the distinction is largely one of institutional design. As regards central bank accounting losses – which have questionable economic significance – this rubicon has already been crossed. So have many others, as we discussed in the Guardian article, and at more length in this Vox article. There is a case for outlining a clear distinction between fiscal and monetary policy, which I have done here. Base money-financed cash transfers are entirely consistent with this distinction, and they are monetary policy.

3) The blog conflates the issue of whether or not base money is a liability with the issue of “reversibility”. There is disagreement on this, but if you accept that money has distinct properties, which seems compelling, base money is not a liability. Whether or not the increase in base money is reversed in the future is a separate and very complex issue. Hence all of Fergus’s analysis of the Bank’s balance sheet is misleading.

4) He also repeats the error of thinking “permanence” matters. He is not alone, and the Vox article he references makes the same error. To cut a long story short, if a household which is strapped for cash receives a cheque in the post from the Bank of England is asked the question, “do you think this is permanent?” they will struggle to understand what that means. And they are right: it is not very meaningful. This has been discussed at length with David Beckworth. And more importantly, all the empirical evidence suggests that when households receive cash payments it boosts their spending.

As a consequence of 4) Fergus makes some odd points about “cancelling” the gilts on the Bank’s balance sheet. There is no economic significance in “cancelling” a bond which the issuer also owns. In effect the bonds are already “cancelled”, and selling them back to the market at some future date – which is a contingent possibility – is economically identical to issuing new bonds.

5) Fergus does correctly identify that the crux of any policy which involves an increase in the monetary base is what to do if at a future date if the stock of reserves is too high. But as discussed here this is easily dealt with and is not a problem unique to cash transfers, in fact it may be less of an issue than with QE if the required increase in reserves is smaller in scale.

These issues, which are largely the focus of the blog, are in fact a distraction. The substantive issue is that counter-cyclical fiscal policy has a host of problems: other than the use of automatic stabilisers, there is no consensus over what to do; fiscal policy is not timely, and it is hostage to the electoral cycle and partisan bickering and point-scoring. It is for these reasons that central banks have been given operational independence.

The real problem today – which is the heart of the matter – is that central banks lack the tools to fulfill their mandates in many plausible scenarios. Their existing tools – reducing interest rates and buying assets – may be counterproductive and destabilising. Central bank balance sheet issues are easily addressed – cash transfers can be made identical to QE in their impact in the Bank’s balance sheet – and independence is easily preserved, by granting the Bank sole control over the size and timing of any transfers, subject to its inflation-targetting mandate. Indeed, if the Bank lacks the tools to fulfil its mandate, a clear structure for helicopter drops might salvage its independence.

[1] Milton Friedman did not really discuss policy issues in his original paper on the “Optimum quantity of money” which introduced the helicopter metaphor. His views are clearer when directly countering arguments on the ineffectiveness of monetary policy at the zero bound in his classic 1968 address. It is here where Friedman alludes to policies similar to those we advocate, which he ascribes to Haberler – and considers an intelligent version of the Pigou effect. Brad DeLong puts it in the tradition of “social credit”.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

3 Responses

  1. joe bongiovanni

    I can see by the EU’s heli-drop criteria the reason why Turner’s “Permanent Overt Money Finance” policy option would not be allowed, primarily because it could, probably should be used for public purpose funding.
    I wish I had a deeper reading of your writings but I really don’t understand the ‘permanent’ question here.
    It was a principal component of both the Chicago Plan and Irving fisher’s various later monetary reform proposals, also that of Friedman in his 1948 “Framework’ proposal.
    It should be clearly understood.
    Funding public deficits with non-debt fiat guv spending, as the replacement of funding via borrowing private bank-issued monies, however originated, changes the nature of the funding ….. FROM one where the money supply is enhanced through borrowing at the bank, and extinguished with loan principal repayment……AND another where the government using its sovereign fiat powers spends the money into circulation ….. permanently (like Greenbacks)…….. for all intents and purposes, as any money in circulation can be withdrawn as a means to control inflation.
    Friedman covered this part very ell, as he called for ending the private bankers’ power of “the creation and destruction of capital” therein.
    Also Fisher in his many books and papers noted the need for “money by rule’, where the money supply itself would not fluctuate via credit market activities (only the sum of the monetary and credit aggregates – decrying “the lawless variability in the supply of the nation’s circulating media”.
    Issuing permanent money eliminates that problematic lawless variability.
    Anyway, I would see any helicopter dropping operation as a permanent money system operation, mainly because it’ll only really work as Wolf says, when we end the power of private banks to create (and destroy) money through fractional reserve banking.
    So, like the Greenbacks were issued in the 1860’s for permanent circulation, removed under the Clinton-Rubin charade in the mid 1990s.
    But necessarily replaced with FRNs comparables .
    Anyway, thanks for the article.


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