John Kay - For a stimulus, boring is best

For a stimulus, boring is best

The image of helicopter money is arresting. The central bank governor flies across the country in a helicopter, a deranged grin on his face as he showers money on a grateful populace.

Of course, this is not what advocates of helicopter money have in mind. They are also anxious to distance themselves from great instances of inflation – most recently that of Zimbabwe, in which the police and army have been paid with freshly minted currency rather than money raised through taxes. Nominal expenditure expands faster than the supply of goods and ever larger quantities of notes must be printed to keep the army and the police supportive of the regime.

The supporters of helicopter money, or the more prosaically titled overt monetary funding, visualise something more subtle. They hope the result of more people crowding the stores with the central bank’s largesse will be more goods in the shops rather than higher prices for the same stock.

Monetary policy is designed to change the composition of public sector debt and corresponding private sector assets. Fiscal policy increases or reduces the amount of public debt. This distinction amid the structure of debt and amount of debt translates into an institutional separation between responsibilities of the central bank and the finance ministry. Advocates of overt monetary funding want to blur these distinctions, encouraging central banks to fund tax cuts without creating government debt.

Monetisation achieves this by issuing notes and coins, and credits given by the central bank (which are offers to issue notes and coins on request). These instruments are not really state obligations. Bank of England notes carry a meaningless promise to pay the bearer a certain number of pounds on demand. Sceptics who doubt the value of the US dollar may, or may not, be reassured that “In God We Trust”. Euro notes tell us only that they are euros. Such currency derives value from our willingness to accept it, and thus represents a liability of us all. The issue of money is a stealth tax, which advocates of overt monetary funding hope will be paid with the increased output from monetary expansion.

There are many ways central banks can give money away without hiring a helicopter. They can buy assets – houses, for example – for more than they are worth, and allow the occupants to live there for a small sum. They can lend against old gold and silver without troubling much to assess the value of the collateral. They can accept IOUs they do not expect issuers can fulfil. They can give creditors implicit or explicit guarantees their future claims will be met even if the borrower fails.

Since 2008 central banks have done these things on a massive scale. They have purchased long-term debt at prices not seen for a generation, and not likely to be seen again; they have refinanced poorly secured private loans; they have purchased obligations of, and underwritten liabilities of, financial institutions and governments of doubtful solvency. All these transactions represent unrecognised public liabilities of uncertain amount and indefinite derivation.

The helicopter has landed: yet the public at large feels little benefit, sees little stimulus. The reason is that the objective of monetisation has not been to put money in the hands of consumers and businesses but to put money in the vaults of banks. To be fair, the central bankers who disbursed it hoped some might work through to the real economy. But their primary objectives were to underwrite the past losses of the banking system and allow the strengthening of bank balance sheets. That is why these mechanisms for printing money have won plaudits rather than excoriation from the traditional defenders of sound currency.

The new radicals want to give the cash central banks are creating directly to the public rather than the bankers. This makes good sense. But Sir Mervyn King, the BoE governor, explained the issue clearly in a speech at Cardiff in October last year (he went by train, not helicopter). “I suspect that the advocates of ‘helicopter money’ and related ideas are really talking about a relaxation of fiscal policy. It would be better to be open about that,” Sir Mervyn said.

It would. It would be better still to implement such a relaxation.

 

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