Helicopter Drops and Quantitative Easing Are Different

David Beckworth (‘The Wrong Debate: Helicopter Drops vs. Quantitative Easing’, EconoMonitor, December 10) leaves the impression that overt money financing is somehow the same as quantitative easing.

He recommends that both approaches should involve a permanent increase in base money, and that both should be anchored to a nominal GDP level/target.  Such recommendations are, no doubt, controversial.

But leaving those issues aside, Beckworth seems to assume that the monetary base growth from large-scale asset purchases would, or could, lead to a permanently higher price level.  This implies the assumption that QE would, or could, lead to consumer price inflation.  The illogicality here is that QE by design, and by method of implementation, is aimed to foster asset price inflation not consumer price inflation.  Because the increased money base does not get into the domestic real economy, but rather sits in bank reserves, flows abroad or raises asset prices at home, there is no significant direct impact on general consumer demand or consumer prices (except, perhaps, through higher import prices and the housing sector before an exit strategy is implemented).  Traders, speculators and high wealth stock market investors who benefit from QE injections have a very low marginal propensity to consume ordinary goods or services.  Little wonder then that consumer price inflation in the United States has been falling for two years, despite massive QE injections.

Inflation would arise if resources were more fully employed but, in and of itself, just shovelling more and more money into the financial markets does not produce higher consumer price inflation.

Another assumption in his analysis is that if only real interest rates could fall even lower (real lending rates have been falling since 1994 and drifted into negative territory in 2011) then markets would clear and investment growth would resume.  This is doubtful logic in an economy where costs are not constraining business profitability, which is now at record high levels, and where there is a gross deficiency in aggregate demand.

Reference is made to a statement by Michael Woodford concerning the possible equivalence of QE and overt money financing (helicopter drop).  The Woodford analysis was challenged in ‘Helicopter Money Debate: Lord Turner and Professor Woodford’, EconoMonitor, May 22 2013 by this author.  I recommend that interested readers consider that article, as it demonstrates that there can indeed be a difference between i) overt money financing of fiscal deficits and ii) the combination of QE and new government bond financed budget deficits.

Mr Beckworth urges readers to stop worrying about whether large scale asset purchases or helicopter money is the more effective policy.  In my judgement, the differences between the two approaches are stark and profound.

One approach (large scale asset purchases and bond financed budget deficits) provides finance to bankers and finances speculation; produces asset price bubbles; artificially levels the yield curve and distorts risk pricing and risk assumption; creates capital outflows which can lead to instability abroad; denies insurance companies, superannuation funds and the retired and the elderly of safe interest returns; and results in competitive devaluation.

The other approach (overt money financing of budget deficits) channels new money to the unemployed, the disadvantaged, to infrastructure projects and so on; that is, the new money flows directly into the real economy.  The recipients of helicopter money have relatively high marginal propensities to consumer ordinary goods and services.

Under overt money financing there is no increase in public debt as under the QE/bond financing alternative.

Should inflation ever become a problem under overt money financing (presumably if the economy approaches full employment too rapidly) then excess liquidity could be removed by sterilisation.

There can be no doubt that overt money financing represents the most powerful combination of monetary and fiscal policies that could be devised to simultaneously address deflation, high public debt and stagnation. See Richard Wood, ‘Conventional and Unconventional Fiscal and Monetary Policy Options’, EconoMonitor, June 30, 2013.