A short reply to Tony Yates (on helicopters)

Tony Yates is a superb economist and has a great blog. He also tends to be relentlessly logical. But his argument against helicopter drops is a rare exception. He makes three points:

“I’m against helicopter drops.  That bit is faithfully got over.  And I worry about them using three lines of reasoning.

1) OLG and ‘new monetarist’ models of money, in which money is not redeemable.  But in which we can show that some monetary policies generate money that has value, and some [like excessive money creation] destroy it.

2) casual historical empiricism that money’s value has been destroyed by excessive money financing.

3) I look at [Willem] Buiter’s proposal to take the standard non-microfounded model of money [which assumes money has liquidity services, and that at the end of infinite time is redeemed] and to remove the redeemability assumption.  And decide that it doesn’t get us closer to deciding what theory says would happen if there were helicopter drops.  Why not?  Because this begs the question about why we should assume money has those liquidity services.”

And a fourth:

“Simon [Wren-Lewis] goes on to say:  ‘Just ask yourself what you would do if you received a cheque in the post from the central bank.’

This urges us not to worry about trying to find a theory to guide us about whether money will be felt as wealth or not.  It just is, isn’t it, by introspection.  Well, no.  Sure, I can get the answer from myself that I will go ‘wtf is going on with policy now, are we really this far up sh!ts creek?  Whatever, I had better try to spend it’.”

Let me briefly reply to 1), 2) and 3).

Money is, by definition, irredeemable. Points 1) and 2) seem to me to amount to a tautology: anything “excessive” is bad. No one is recommending cash transfers equivalent in magnitude to the money base expansion under QE (I even make the case for a constant monetary base cash transfer).

3) This is closer to being a substantive point: why should we assume that money has liquidity services? But again, this fails the test of basic logic. The definition of money is a “liquidity service”. Why should we assume that we can sit on chairs? If the central bank sends me £100, I can buy things. That is true in all circumstances.

I conclude that the main point that Tony is making is for an extreme conservatism in monetary policy: don’t do anything unusual with money because the population might go “wtf!” and start behaving like headless chickens.

The problem is, if you believe that, you would never do QE: “The government is going to buy back 30% of its outstanding debt by printing money”. Oh, that’s ok. “The central bank is giving us a fraction of that in cash”. Panic!

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’.

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