One way to implement helicopter money is to have the government finance a tax cut or a government spending increase, with a conventional bond issue, and have the central bank buy the bonds with newly created electronic money.
During the post-2008 recession, tax revenues fell, government spending [in the UK, at least on transfer payments] and bond issuance rose, and central banks bought government bonds with electronic money. A lot of them.
This policy was called ‘quantitative easing’, not ‘helicopter money’ because it was the first leg of a two-leg policy, where the second leg would involve reversing the bond purchase down the road after the economy had recovered. But half way through, the two policies are indistinct. ‘They’ might be doing helicopter money anyway, even though it’s called ‘quantitative easing’.
Are they doing helicopter money anyway? And if they were, what would we infer from whether we should?
There seem to be several varieties of the argument.
One is they are doing helicopter money anyway, so they should jolly well come clean about it and stop hoodwinking the people. And if they did, the policy would be more successful in boosting the economy. QE involved a smaller stimulatory bang for the buck, the buck being a risky intermingling of monetary and fiscal institutions.
Another variation on the argument, that I heard recently, was that they might be doing it anyway, and that shows that if they did do it explicitly, we would not expect any magical extra stimulus to follow. So best leave central bank policies as they are.
Yet another is: since when we do QE, we will look like we are doing helicopter money anyway, we shouldn’t do QE at all’. This argument was circulating inside central banks at high velocity as it became clear that central banks were going to run out of interest rate cuts and something else would have to be done. Evidently, it was set aside as central banks went ahead with QE regardless.
Central banks’ retort is: a helicopter money plan is clearly delineated from a QE plan by the fact that it involves only one leg, not two, of the QE policy, ie a transaction that is never reversed.
But this delineation is only as good as the ability central banks have to tie their hands in the future to reverse the bond purchases, thus finally revealing with certainty that the policy was QE and not HM. Since that might involve tying the hands of different people who succeed the current decision makers as Governors and voting members, such certainty is not possible. Knowing this, QE is unavoidably somewhat HM-like.
But by the same token, a bond purchase that was determinedly announced as HM would be unavoidably QE-like: subject to a possible reversal down the road when a more conservative central banker takes over.
Where do I come out on all this?
I think that there is some possibility of influencing the guess that people have about whether QE is reversed at down the road.
Committees don’t turn over completely each period, so quicker reversals can be executed more reliably than slower ones.
New members are likely to find the reputation for promise keeping of some value to themselves – perhaps to distinguish a new round of QE from HM, or vice versa! – so they won’t feel entirely unbound.
And the separation between the policy could be encouraged – if not entirely guaranteed – by the finance ministry, or a third party body that scrutinises the central bank [in the UK, the Treasury Committee, say]. And I say ‘not entirely guaranteed’ for the obvious reason that we can’t expect the fiscal authority to discipline itself to limit monetary financing, precisely the reason why there is often legislation that attempts to rule it out.
Since there’s hope that the two can be delineated, QE should be the first resort at the zero bound, [well, after plain bond financed fiscal policy, that is] and HM the last.
[Inspired by slide-show I saw recently that I can’t attribute as it was given under Chatham House rules].
Doesn’t the “second leg” arrive automatically when the bond matures? They are not buying consols, anyway. Or do you mean that the CB would commit to roll the debt over indefinitely (which would happen through purchases of new bonds as the old ones mature)?
Your discussion of the possible reversal, and inability to tie hands, reminds me of Bill White’s Project Syndicate article from 2013 (a reply to Adair Turner): https://www.project-syndicate.org/blog/overt-monetary-financing–omf–and-crisis-management
You might have read it, but if not, do check it out. In it he writes, for instance: “A final point concerning permanence is whether the monetary authority can credibly commit to such “permanence”. Central banks have repeatedly changed both their objectives and their preferred analytical models over the last 30 years.”
That’s right. Good point. BoE and Fed both undertook to reinvest, ie that their policies were about stocks held. But if they don’t, then as you point out, there is no need for a conscious sale.
Government borrowing makes no sense, as pointed out by Milton Friedman and Warren Mosler. Even the arguments for borrowing to fund capital investment (infrastructure etc) are feeble. Ergo any government borrowing artificially raises interest rates and thus misallocates resources and reduces GDP. Ergo we should carry on doing QE till the entire debt vanishes.
If that’s inflationary, then raise taxes so as to cut the excess inflation.
And if by any chance government borrowing to fund capital spending CAN BE justified, then it makes no sense to subsequently QE relevant bonds, or have the central bank buy them back so as to cut interest rates: that contravenes the basic purpose of the bonds which is to enable government borrowing at interest so as to fund capital spending.
“a helicopter money plan is clearly delineated from a QE plan by the fact that it involves only one leg, not two, of the QE policy, ie a transaction that is never reversed.”
I don’t know where that version of the explanation of the distinction started or why on earth it caught on, but its incoherent nonsense.
The only coherent story has to do with the relationship between the timing of the central bank action to create money, and the timing of the fiscal expenditure that is ultimately associated with the creation of the money.
QE involves a time lag.
Very nice blog. I also very much liked one of your previous blogs calling on more cooperation between Treasury and BoE. Indeed, it is very much this issue that highlights one of the primary differences between QE and Overt-Monetary-Financing, Helicopter money, Sovereign Money Creation etc, which I think is worth mentioning. Under QE the process of financing
a deficit happens as follows:
• The government determines the quantity of government spending.
• The government borrows (by issuing bonds) to finance the deficit.
• Then central bank can then choose to alter the composition of how the deficit is financed, by using
its powers of money creation to ‘buy back’ government bonds from the markets, in effect changing
the composition of government financing after the fact.
Without Treasury and BoE cooperation, making QE permanent would not have encouraged the government to increase its spending in any way. QE and Permanent QE is therefore a reaction by the Bank of England to earlier spending decisions made by the government. OMF and Helicopter Money involve much more fiscal and monetary cooperation so that there is a direct increase in government spending as a result of the BoE intervention (so that government spending increases more than what would have otherwise been the case).
It is the end of 2016, it is remarkable that people are still writing about this.
Two thing I would like to see in the article:
1. A la Ralph Musgrave, borrowing means you dont have the guts to tax. Can you say that somewhere, so people remember that the use of borrowing or the use of new electronic money are away to avoid taxing the wealthy (who have the means, and obviously also have the political power to stop the taxation pf the concentrated wealth).
2. When saying ‘reverse’ the borrowing, you should distinctly adress how this is done, including pointing out how the public bond papers held on the books of the central bank can simply be erased. So, redemption via offset and erasure mechanisms need to be spotlighted.
But you are all right – redemption at maturity by offsetting within the books creates helicopter money at that time. In the US the maturities averaged in years (around 5, I think), and how does that make sense in light of how US finance law requires the public bonds to be sold privately first (drawing monies from private books first at the time of sale).
Well, guess we do need more writing on this, as some of it challenges common sense.
I’m sorry but you miss the most important distinction between helicopter money and both QE and direct central bank purchases of newly-issued government bonds. The latter two strategies, by convention, involve government borrowing and hence increase the reported national debt. Even after the central banks buy the government bonds, they remain recorded as part of the “soaring national debt.” This freaks out just about everyone, as the various national debts climb beyond 75% of GDP. So this approach politically discourages using fiscal stimulus when we need it.
Helicopter money is better called “stimulus without debt.” The central bank creates new electronic money and credits it to the government’s spending account. No government borrowing is involved and no increase in the national debt is recorded. Needed stimulus goes forward without everyone getting hot and bothered about increasing “crushing national debts.”