‘Helicopter Money’ Won’t Offer Much Lift: Narayana Kocherlakota



This article (link above) entitled “‘Helicopter Money’ Won’t Offer Much Lift” from Bloomberg/Newsrooom appeared today. It was written by Narayana Kocherlakota, now a Bloomberg View columnist, who also is the Lionel W. McKenzie professor of economics at the University of Rochester, and who also was the 12th president of the Federal Reserve Bank of Minneapolis from 2009 through 2015. In this article, Narayana Kocherlakota mentions “global central bankers’ quest for unconventional ways to stimulate weak economies”, with the old idea of dropping “helicopter money” directly to the people, or the gov’t, to spend. Knowing that this idea is more sensation than sensible, Narayana Kocherlakota then makes his most powerful point:The government has all the borrowing and spending power it needs to boost the economy and get inflation up to the desired level, if only it had the will.”

Bingo…In a nutshell, he says exactly what is presently ailing most of the world economies.

Inspired by this, I emailed him. In lieu of a lack of will by fiscal policymakers, I offered my own unconventional idea for monetary policymakers that I personally believe would immediately work to remove the ‘specter’ of federal government debt, and restore confidence to consumers. This idea, in my opinion, would unleash that pent-up aggregate demand here in the US, and even more so if implemented in Japan, but this idea would not work in the Eurozone. Forget the EZ, with their incomplete setup, without a federal government bond (like the US and Japan), and also without a centralized, fiscal policymaking branch with strong authority (like the US and Japan), the troubles in the EZ will last a very long time…The only hope for any member state is to ‘exit’ the EZ, my guess Italy will be the first (?), get back their ability to issue sovereign currency, and reacquire that needed ‘adjustment mechanism’ that they had lost. I also thanked Narayana Kocherlakota for his public service and he was kind enough to reply back (and polite enough to gently put that he was skeptical of my idea). Here is my message and his reply:

From: <eddie_751@hotmail.com> To: NARAYANA: Agreed that if fiscal and monetary policymakers were in sync, they could work together to generate inflation, but if not, instead of talking about helicopter drops (which would be politically untenable), I have another suggestion: ‘Quantitative Redemption’. The Fed has $2T in Treasury bonds on its balance sheet. Announce that starting today, $167 billion per month, will be, effective immediately, ‘redeemed’. Paid off. Ripped up. One arm of the federal gov’t (Treasury) issued those IOUs and another arm of the federal gov’t (Fed) bought them back. Instead of continuing to ‘impound’ these bonds on the Fed’s balance sheet (Peter paying Paul), by the end of one year, all $2T won’t exist anymore. Anybody that knows Treasury bond markets can guess what would happen next: This outright decrease in supply would bid up prices of Treasury bonds and pressure rates lower (Thus ‘QR’ done sooner would mean ‘QE2’, ‘QE3’, ‘The Twist’, and endless Fed jawboning would not have been necessary). Anybody that knows what Treasury bonds are also knows what this ‘redeeming’ of Treasury bonds means: Decreased ‘National Debt’ which decreases Groupthink’s perceived imminent ‘danger’ to the financial security of the country, and also decreases the need for any more Kabuki theater in Congress over raising the ‘debt ceiling’. Furthermore, anybody that knows what this telegraphed, intentional money creation means, can also guess what would happen next: Consumers and businesses would front run the approaching dilution, or reduction, in the purchasing power of their cash, and start making those purchases +/or investments that they had been postponing since the financial crisis of 2008. Instead of another helping of obstructionism, fiscal policymakers in Congress *could* get in sync with monetary policymakers, assist them by concentrating on boosting the economy, enacting productive, counter-cyclical fiscal policy measures, and generating inflation to the desired level…“If it had the will”.

His reply:

Thanks for the comment.

I should think more about this –

but my first reaction is skepticism.

Suppose the Fed forgives all of this debt.

Would this make the Fed less willing to raise rates, more willing to tolerate inflation?

Maybe – but, as I say, I’m skeptical.

Thanks again.