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Wolf and Kaletsky on the monetary financing of deficits

Martin Wolf and Anatol Kaletsky both picked up on a speech by Adair Turner, in which he openly advocated monetary financing of debt. QE and other forms of non-conventional policies had not brought the desired benefits, and it was now time for the biggest of all bazookas.

Martin Wolf picks up on the debate about nominal GDP targeting, and calls for an official re-assessment of the current inflation targeting regime, which he says is failing in the current environment.

I agree with Lord Turner that the even more important question is how to make any policy effective. This, inevitably, raises questions about how monetary policy works in an environment of ultra-low interest rates. Lord Turner thinks the unthinkable: namely, monetary financing of the fiscal deficit. So should policy makers. They have to think afresh. If not now, when?
Anatole Kaletsky recalls that Keynes and the Monetarist agreed on the notion that in dire circumstance the central bank should create money. Keynes advocated money to be deposit in coal mines, for workers to extract it. The monetarists chose the then high-tech variety of a helicopter drop. This is how Kaletsky would do it:
Consider the U.S. Federal Reserve. At present the Fed prints $85 billion of new money monthly and distributes it to banks and Wall Street investors by buying government bonds. And the Fed has promised to continue this monthly "quantitative easing" until such time as unemployment drops and is clearly and sustainably declining to more normal levels. Now suppose instead that the Fed divided its $85 billion monthly money production into 300 million checks of $283 each and sent these to every man, woman and child in America. Suppose, moreover, that the Fed promised to keep sending out these checks, worth more than $1,000 a month for a four-person household, until the United States reached its unemployment target - and the Fed chairman added that he would increase the checks to $1,500 or $2,000 a month for that household if $1,000 monthly proved insufficient. There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment - and no doubt that it would be infinitely more effective than distributing money to bond investors and banks through QE.


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Fri Feb 8th, 2013 at 04:12:11 AM EST
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Anatole Kaletsky: A breakthrough speech on monetary policy (Reuters, February 7, 2013)
Wednesday night may have marked the "emperor's new clothes" moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that doesn't have to be humored. That delusion today is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a "new normal" of mass unemployment and declining living standards is inevitable for years or decades to come.

That such economic fatalism is nonsensical is the key message of a truly historic speech delivered on Wednesday by Adair Turner, chairman of Britain's Financial Services Authority and one of the most influential financial policymakers in the world. Turner argues that a virtually surefire method of stimulating economic activity exists today and that politicians and central bankers can no longer treat it as taboo: Newly created money should be handed out to the citizens or governments of countries that are mired in stagnation and such monetary financing of tax cuts or government spending should continue until economic activity revives.

The idea of distributing free money to end deep recessions has been promoted theoretically by serious economists since the 1930s, when it was one of the few practical policies that Keynesians and monetarists agreed on. John Maynard Keynes proposed burying money in disused coal mines to be dug up by unemployed workers, while Milton Friedman suggested dropping money out of helicopters for citizens to pick up. Friedman also argued in a 1948 paper that governments should rely solely on printed money to finance their regular cyclical deficits. More recently, as conventional policies to revive growth have faltered, with widespread disappointment about the impact of zero interest rates and quantitative easing, proposals for distributing money directly to citizens have been quietly gaining traction among critics of orthodox central banks. I discussed this trend, sometimes described as "quantitative easing for the people," in several columns last year.



I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Fri Feb 8th, 2013 at 04:15:36 AM EST
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The first comment predictably says "OMG Weimar".
I believe the answer to this is "Zero Lower Bound"?
(Or "Liquidity Trap".)

Here's Krugman

From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you're in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes.
[...] clearly, there's something about the notion that the rules for policy depend on the situation that some economists just don't want to understand.



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sapere aude
by Number 6 on Fri Feb 8th, 2013 at 06:38:05 AM EST
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Much of that is good but...

"John Maynard Keynes proposed burying money in disused coal mines to be dug up by unemployed workers"

... I wish he did not help propagate that meme. Keynes was sarcastic there, showing how the goldbugs made no sense. He certainly proposed infrastructure spending as a better way to give newly created money to the unemployed.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Feb 9th, 2013 at 04:13:13 AM EST
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Lord Turner thinks the unthinkable: namely, monetary financing of the fiscal deficit. So should policy makers. They have to think afresh. If not now, when?
We really are in a dark age of macroeconomics when we have to rediscovered what we knew 80 years ago.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Fri Feb 8th, 2013 at 06:05:03 AM EST
[ Parent ]
"Lord Turner thinks the unthinkable: namely, monetary financing of the fiscal deficit. So should policy makers."

Indeed that should be olds, not news, but this is big. Because it's written in the FT.

It will be long before that becomes a reality, however after 40 years of right-wing propaganda, it's a welcome change to see some sense beginning to appear where it's likely to be read.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Feb 9th, 2013 at 04:16:34 AM EST
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