...against fictions and other tall tales

Saturday, 23 February 2013

Helicopter money: an operational view

Much has been written about Adair's Turner suggestion that central banks should consider financing public spending but I thought this short exchange between Adair Turner and economist Mario Seccareccia at an INET conference in 2011 is worth pointing out.

Here's Adair Turner's question:
[About Japan]...why wouldn't it been better still to do what Friedman said was the correct policy post facto in the 1930s, which is "helicopter money". Why wouldn't a better policy had been for the Japanese government to simply run fully, overtly, monetized deficits so that the last [inaudible] percent of GDP was not in the form of a debt contract held by the Japanese private sector but was in the form of absolute, categoric fiat money? (at 2:30 here)
This is Mario Seccareccia's response:
[About the] issue which had been raised about fiscal policy and the "helicopter drop" [vs conventional deficit spending]. That's a false dichotomy. I mean, deficit spending is -- in a sense -- monetization all the time. [Bond issuance is] how the central bank then behaves to clear or sterilize -- so to speak -- those reserves in the system in order to meet its interest rate policy. Period. There is no such thing as a "helicopter" doing this. It's always done through deficit spending fundamentally, I would argue. (at 9:00 here)
The point to remember when thinking about a central bank's ability to inject exogenous increases in reserve balances is that in a monetary regime such as Japan (and the UK for that matter) where the central bank targets an interest rate and the remuneration rate on reserves balances isn't set at the same level as its target interest rate, the central bank can't conduct offensive open market operations aimed at increasing the amount of reserve balances without simultaneously frustrating its goal of keeping its benchmark interest rate on target. Under such a regime the central bank's ability to control money growth is essentially limited to conducting defensive open market operations aimed at keeping its interest rate on target.

UPDATE: A very detailed look at the "helicopter drop" issue is found in Scott Fullwiler's article "Helicopter drops are fiscal operations" (2010). For a general discussion on offensive vs defensive open market operations, see Lombra, Herendeen and Torto, Money and the Financial System, page 425, 1980.

Saturday, 16 February 2013

Steve Keen on interest and capitalism's main dilemma

A few fine words from Steve Keen:
Interviewer: On a broader topic, is interest a kind of rent in the classical sense? Is it income without a cost of production?  
Steve Keen: Absolutely. This is why...I see the main dilemma in capitalism as being the conflict between financial capital and industrial capital. Industrial capital is ultimately productive. And if you look at workers and capitalists, they both ultimately benefit out of the technological developments over time and demands over wages. If unemployment is not gigantic, they benefit out of the improvements in current technology and out of productivity at the time as well. The real albatross around the neck of capitalism is financial capital [inaudible] when you let it get beyond the level necessary to simply finance working capital in some new investment. And it’s what happens every time capitalists take over...
...The thing I think we’re both in agreement on is we have to stop people, and particularly social classes, becoming dependent upon unearned income. Ultimately the only way to get a functioning capitalist society—or a society in general—is to have one where the source of income is earned, not unearned. And when you look at land speculation, or you look at any other form of speculation, people are trying to get income without earning it. That’s the real dilemma in capitalism. And if we direct ourselves toward that particular principle then we’re both on the same side. (Renegade Economists, April 21, 2010, at 13:30)
There's lots of good insight here. A fine glimpse of "Keensian" economics.  And I totally agree with the general point of the last sentence: "...then we're both on the same side". There's plenty of commonalities out there. We just need to focus on these.

PS: I'm entering a busy period at work. Posting will be limited and mainly consist of short thoughts on and snippets from economists I find interesting.