The Law of Reflux vs Helicopter Money

Let me start out with an extreme (and very silly) assumption, just so I can explain something simply. Assume that the demand for currency does not depend on the price level, nor on real income, nor on interest rates, nor on anything. It's just fixed. Every individual wants to hold exactly $100 in currency, no more no less, regardless of anything.

And let's start out with a very simple monetary system. There's a central bank that issues currency, that people use as their sole medium of exchange, to buy and sell everything else. No other banks at all. So it's a simple money supply function, and a totally degenerate money demand function Md = $100 x population.

And let's start out in monetary equilibrium, where the money supply (the stock of currency in circulation) is exactly $100 per person.

Is Helicopter Money impossible? If the central bank prints more currency, and drops it out of a helicopter, will the people refuse to pick it up, and leave the newly-printed notes lying on the sidewalk?

No. That's silly. They will pick it up, and spend it. Each individual knows they he can get rid of any excess money, even though it is impossible for individuals in aggregate to get rid of excess money. What is true for each individual is false for the whole. It's a fallacy of composition to assume otherwise.

But this extreme (and very silly) example shows that money, as medium of exchange, is very different from any other consumer durable. If the central bank were giving away free fridges, and everyone already had one fridge, and only wanted one fridge, everybody would leave the free fridges lying on the sidewalk.

Money is weird, because even though economists talk about people demanding a stock of money, that desired stock of money represents an average (over time) level of inventory in my pocket, where money is both flowing into and out of my pocket, so the stock of money in my pocket at any time fluctuates above and below its average level. Money circulates. And paper currency is intrinsically worthless money, which means that if I offered you a $20 note, but made you promise you would keep that note in your pocket always and never spend or give it away under any circumstances, you would refuse my offer.

In this extreme (and very silly) example, Helicopter Money would not be impossible; instead it would be extremely powerful. If I had made the more sensible assumption that the demand for currency is proportional to nominal income, then doubling the supply of currency by Helicopter Money would double the equilibrium level of NGDP. But with my silly assumption the multiplier is infinite. The Helicopter Money is a Hot Potato that never cools down no matter how much the price level or real income rise.

Now let me assume that the central bank also offers savings accounts, as well as issuing currency. Savings accounts may pay interest (at a rate set by the central bank), but cannot be used as a medium of exchange.

Start in equilibrium where the stock of currency is exactly $100 per person. What happens if the central bank prints more currency and drops it out of a helicopter, holding constant the nominal rate of interest it pays on savings accounts?

I know what you are thinking. I know how most economists would be thinking. (At least, I think I do.) "Aha! This time it's different! Because now people can get rid of the excess currency, by depositing it in their savings accounts at the central bank, so Helicopter Money won't work." You are implicitly invoking the Law of Reflux to say that an excess supply of money must return to the bank that issued that money.

And you are thinking wrong. You are making exactly the same fallacy of composition as you would have been making if you said that people would leave the excess currency lying on the sidewalk. "People in aggregate can only get rid of the excess currency by depositing it in their savings accounts (or throwing it away) therefore each individual will get rid of his excess currency by depositing it in his savings account (since it's better than throwing it away)."

There are 1,001 different ways an individual can get rid of excess currency, and depositing it in his savings account is only one of those 1,001 ways. Why should an individual care if depositing it in his savings account is the only way that works for the aggregate? (If people always thought like that, littering would never be a problem.) And if individuals do spend any portion of their excess currency, so that NGDP rises, and is expected to keep in rising, then the (assumed fixed) nominal interest rate offered on savings accounts at the central bank will start to look less attractive, and people will actually withdraw money from their savings accounts. Not because they want to hold extra currency, but because they plan to spend it.

Money is weird like that. Money is not like marriage "to have and to hold". We want to get our hands on the intrinsically worthless medium of exchange only because we plan to get rid of it again. If we could never get rid of it, we wouldn't want to have it, even for free.

Now let me bring commercial banks into the story. The central bank issues currency, and also offers accounts at which central banks can keep "reserves". People use both central bank currency and commercial bank chequing accounts as their media of exchange; commercial banks use their reserve accounts at the central bank as the medium of exchange they use for transactions between themselves. And the central bank allows commercial banks to swap currency for reserves in either direction, and reserves pay a nominal rate of interest set by the central bank.

My story now (as best as I can tell) matches the (implicit) model in "Helicopter Money: the Illusion of a Free Lunch" by Claudio Borio, Piti Disyatat, and Anna Zabai. (HT Giles Wilkes.) They argue that Helicopter Money will be unwanted and must Reflux to the central bank to be held as central bank reserves, where those reserves pay interest and so are just like (very short-term) government bonds, or savings accounts at the central bank. Their argument rests on a fallacy of composition. Individuals in aggregate can only get rid of unwanted currency that way, but this does not mean that individuals will choose to get rid of unwanted currency that way.

We know, empirically, that helicopter money (in moderation of course) does not lead to bizarre consequences. Helicopter money is perfectly normal; central banks do it (almost) all the time. They print currency, the stock of currency grows over time, and since that currency pays no interest this is a profitable business for central banks and the governments that own them. And the governments that own central banks sooner or later spend those profits, by having transfer payments higher, or taxes lower, than they otherwise would be for the same level of government expenditure. Aside from the political question of the government deciding who the helicopter flies over, and when it flies, it is exactly as if central banks were doing helicopter money as a normal part of their operations.

The demand for central bank currency seems to rise roughly in proportion to NGDP (the US is maybe an exception, since much is held abroad), so countries with rising NGDP are normally doing helicopter money. And doing helicopter money, just once, does not empirically lead to central banks being forced to set nominal interest rates at zero forever. And it would be utterly bizarre if it did; what else are governments supposed to do with the profits central banks earn from printing paper currency?

The lesson we learn from all this is that the Law of Reflux will prevent Helicopter Money from working only if the central bank refuses to let NGDP rise at the same time. Which is like saying that pressing down on the gas pedal won't work if you press the brake pedal down hard enough so the car can't accelerate.

Comments

[C Trombley]

"... [M]oney, as medium of exchange, is very different from any other consumer durable. If the central bank were giving away free fridges, and everyone already had one fridge, and only wanted one fridge, everybody would leave the free fridges lying on the sidewalk."

The fridges could be carted to a safe warehouse and there would be trade in paper claims to fridges. Isn't this what finding gold does under a gold standard? Why are fridges different from money?

[baconbacon]

"Assume that the demand for currency does not depend on the price level, nor on real income, nor on interest rates, nor on anything. It's just fixed. Every individual wants to hold exactly $100 in currency, no more no less, regardless of anything."

If everyone wanted to hold exactly $100 in currency they wouldn't then sell goods or services for money. One doesn't trade something useful for something you don't want, and you have skipped that half of the equation. If the government drops HM all around people will, at first, pick it up and spend it. Eventually though, as has been seen in hyperinflations, it literally does lie on the ground unused (or is swept up and burned for heat) as producers stop accepting money for their products.

If yo model a situation in which demand for currency doesn't change with the price level, interest rates or real income the result will still be reduced production of goods and services (relative to trend growth).

[Nick Rowe]

CT: if fridges were used as money (or if IOUs for fridges were used as money), then yes the fridges would not be left lying on the sidewalk.

Bacon: yes. That is the end result of NGDP increasing by an unlimited amount. That's what would happen if the demand for money did not depend on NGDP. It's like Helicopter money working too much, and the central bank needing to reverse it.

[Peter V. Bias]

Hi Nick,

I find it interesting that Claudio Borio, Piti Disyatat, and Anna Zabai believe that they can lecture Milton Friedman that there's no such thing as a free lunch. That's rich.
Trombley, if no one wanted the fridges why would there be carting and paper claims for fridges?
Too literal, Baconian. Simply an average of $100 will work; period to period. After all, no one is continuously maintaining Gossen's Second Law; just at a (brief)equilibrium. We're out of equilibrium as we put the money down, in equilibrium for an infinitesimal moment, and already back out again as we pick up the burger.

Pete

[baconbacon]

@ Pete,

We are given an absurdly simplified example, the assumption of individuals wanting to hold $100 fits in the same level of oversimplification. You can't build a model where half is real world complexities and half is oversimplified and draw any kind of conclusion from it.

Even if we did grant some complexity and start averaging over periods, you would still encounter the time frame where a person has been given $100 in HM, he would then, over the next period, have far less impetus to earn that $100, which would decrease total production.

[baconbacon]

@ Nick,

The difference is only in degree not in kind. Any HM given out must reduce the value of earning the next dollar, which reduces the marginal propensity to produce. Barring extreme elasticities, the model suggests that any HM must reduce real income on an aggregate level when you include production, not just consumption.

[Majromax]

> And paper currency is intrinsically worthless money, which means that if I offered you a $20 note, but made you promise you would keep that note in your pocket always and never spend or give it away under any circumstances, you would refuse my offer.

Although interestingly, this is a different result than if I gave you $20, but made you promise that you keep at least $20 in your pocket at all times, forever, even if it is not necessarily that bill. In this case, the less liquidity-constrained that you are (that is, the less likely you think it would be for your pocket cash to ever fall below $20 under ordinary circumstances), the more that $20 of mine looks like spendable wealth.

[Market Fiscalist]

I am sure that the states that experienced hyperinflation in the past few decades did serious helicopter money , and did not experience interest rates permanently at zero despite lack of serious CB offset. I wonder how that fits into the model described in the linked to post ?

[Peter V. Bias]

@ bacon,

Agreed, it's very simplified. Not sure what happens in this model. Seems that merely an extra dollar of HM would lead to the same results - infinite NGDP, infinite inflation, infinitesimal production, and zero interest rates - because it would always be the hot potato. But notice that actual demand functions would call for optimizing - bang for the buck stuff - which would preclude there being these infinities.

Pete

[baconbacon]

"And paper currency is intrinsically worthless money, which means that if I offered you a $20 note, but made you promise you would keep that note in your pocket always and never spend or give it away under any circumstances, you would refuse my offer"

If you offered me a refrigerator on the condition that I put it in my picket and never use it, I would also reject that offer. Does that mean refrigerators are intrinsically useless.

[Henry]

Nick said:

"Each individual knows they he can get rid of any excess money, even though it is impossible for individuals in aggregate to get rid of excess money. What is true for each individual is false for the whole. It's a fallacy of composition to assume otherwise."

Isn't this only the case at full output/employment equilibrium, which if it pertains, is not the condition in which HM will be deployed?

[Max]

"interest rates at zero forever" reminds me of MMT.

[C Trombley]

Peter V. Bias: "Trombley, if no one wanted the fridges why would there be carting and paper claims for fridges?"

Because - as Rowe points out - they could be used as money. If you like details, one could say that there is always being a demand for fridges because of physical depreciation, which in this analogy plays the role of the government tax in the Wicksteed argument for paper money (fridge IOUs) having positive value.

[Kto1243]

Bacon - you are still making a big mistake. You are assuming that the marginal propensity to consume has been met prior to the HM. Furthermore, you are assuming that the marginal propensity to produce was at capacity - which it may or may not be.

[Henry]

"Isn't this only the case at full output/employment equilibrium, which if it pertains, is not the condition in which HM will be deployed?"

Nick,

After I posted this I almost posted saying this is a stupid thing to say. Then I realized (perhaps incorrectly) there is difference between money and income. If the economy is in a state of underemployment there will be goods and services and labour which are not being supplied to their full capacity, and people always have goods and services they would wish to buy had they the income or the money. People may go off and spend some portion of the helicoptered $100 on domestic goods and services (some will repay debt, some will end up under the mattress, some will leak out to foreign purchases) and perhaps eventually that money will return to them by way of goods, services and labour they may have offered in return for the extra spending. The point is, while people may still end up having the money burning a hole in their pockets, the round of spending will have lifted the output and employment in the economy.

[Nick Rowe]

Peter" "Gossen's Second Law". I had never heard it called that, (or heard of Gossen)! Interesting.

Majro: "Although interestingly, this is a different result than if I gave you $20, but made you promise that you keep at least $20 in your pocket at all times, forever, even if it is not necessarily that bill."

I disagree. I think the two cases are exactly the same.

MF: yep.

bacon: "If you offered me a refrigerator on the condition that I put it in my picket and never use it, I would also reject that offer. Does that mean refrigerators are intrinsically useless."

We can use a refrigerator without selling it.

Henry @ 7.29. You got it. And as the extra money keeps coming back to them as they spend it, they spend it again.

[Nick Edmonds]

Is your view that Helicopter Bonds would work as well as Helicopter Money, providing the NGDP target is same in each case?

[JF]

Money or bond? A bond is a legally enforceable claim on future flows that return the initial money plus some more.

Money does not have the same meaning in terms of enforcing the future to fulfill the claim.

In modern time bonds of a reserve currency issuer are similar to money as wealth and as a medium of exchange. Their main difference is in the notion of legal enforcement of the claim on the future.

So incoming taxes and distributed-money (HM) have the same meaning as flows, and here is the main difference, the newly printed bond grants a future claim to the buyer, and this is precisely the tool of those who want to redistribute wealth and income control upward. Incoming taxes or HM to finance spending that is of a broad character - not bonds, as they are too often used as tools of upward redistribution, and this type of result must be halted in a wealthy, political economic system as found in the late 20th Century and currently in the US.

This is a political, enforceability matter of much greater import than monetarism's concerns. Ought not be forgotten or obfuscated or confused by the question of whether money or bonds are the same.

JF

[Majromax]

> Majro: "Although interestingly, this is a different result than if I gave you $20, but made you promise that you keep at least $20 in your pocket at all times, forever, even if it is not necessarily that bill."

> I disagree. I think the two cases are exactly the same.

I think there's a difference, but it gets to really interesting interactions between liquidity and wealth.

Imagine I am Warren Buffet, and you make that deal with me. I ordinarily prefer keeping $1,000 in my pocket, and I expect that value to fluctuate up or down over the course of a day, returning to target whenever I pass an ATM.

With no financial intermediation, you're right in that if you give me $20, I now have $1,020 but I have to treat $20 like the new $0. However, we do have financial intermediation. In principle, I could buy insurance such that if I ever find myself about to spend the last of my pocket money, I could press a button to have $20 delivered to me until I can get to the ATM.

If the cost of this insurance (over time, etc) is less than $20, then the difference between that cost and the original $20 is consumable wealth. If you make the same deal with both me and my hundred closest travelling companions (with independent spending patterns), we could even insure amongst ourselves.

In a sense, we're right back to your main point. Imagine now we're dealing with banks and reserves and cash doesn't exist. The CB deposits the $20 in "the banking system" somewhere, and it refuses to take it back. Now, we're in your original situation where the laws of accounting force "the banking system" to keep that $20, but at the same time banks will act as if they are collectively wealthier.

[baconbacon]

@ Nick,

We can use a refrigerator without selling it, but we get maximum value when it is used in conjunction with other parties (hooked up to an electric outlet). The intrinsic value of a refrigerator, that is what it is worth on its own, is very low when compared to its value connected as part of a system like virtually all our goods now. Money is just on the extreme end of this spectrum.

[Too Much Fed]

"Every individual wants to hold exactly $100 in currency, no more no less, regardless of anything."

Let's relax that.

"And let's start out in monetary equilibrium, where the money supply (the stock of currency in circulation) is exactly $100 per person."

OK. Now helicopter $100 with "no bond attached" to Warren Buffett. He does not want to spend it in the real economy. He thinks financial assets are overvalued. He decides to hold it (use it as a savings vehicle) for 10 years.

Nothing happens for the 10 years?

I would like to say that Warren Buffett has saved the $100 although technically I think that is not correct.

[Majromax]

@TMF: Your premise is inconsistent.

> He does not want to spend it in the real economy.

Why not? Is Buffet a soulless robot? Is there nothing he can do with $100 to derive a shred of utility, even if it's giving it to a homeless orphan for a smile?

> He thinks financial assets are overvalued.

He thinks that every single financial asset is overvalued? That's another impossibly strong assumption.

> He decides to hold it (use it as a savings vehicle) for 10 years.

Buffet, being rational, would not do that. Instead, he'd purchase a 10-year US Treasury (currently yielding 1.72%) for the savings, since that exchanges the liquidity (which you said he does not benefit from a priori) for return.

[Nick Rowe]

bacon: " Money is just on the extreme end of this spectrum."

I agree with your conclusion, but for slightly different reasons.

A car is worth more if the buyer has the option to sell it again, than if the buyer were never allowed to sell it. We can define "liquidity" as (1-the ratio of those two values). Paper money is the extreme case.

I did a post on this, years ago.

[Nick Rowe]

Nick E: would it be feasible to use helicopter/vacuum cleaner bonds to target NGDP (holding M constant)? I remember thinking about this once, and deciding it was LR unsustainable. Can't remember my exact reasoning. (Plus with distorting taxes, it's inefficient).

[baconbacon]

@ Nick,

We are in agreement to a point however when you wrote this

"But this extreme (and very silly) example shows that money, as medium of exchange, is very different from any other consumer durable. If the central bank were giving away free fridges, and everyone already had one fridge, and only wanted one fridge, everybody would leave the free fridges lying on the sidewalk."

You draw an inaccurate conclusion that money and refrigerators are very different. Their demand functions work the same way if you price them the same way. When you price a refrigerator you say "how many dollars would you pay to have a new fridge?", when you price dollars you phrase the inverse question "how many dollars do I have to give you to part with that fridge?". Under hyperinflation many goods are no longer available at any real price in terms of the local currency, under these circumstances people stop picking up dollars on the street, no matter how many zeros you

Of course the number of refrigerators that the Fed or Bank of Canada would have to produce before they started piling up on sidewalks is much lower than the number of dollars, but as I said that is a difference of degree, not of kind.

[Too Much Fed]

Majromax said: "> He does not want to spend it in the real economy.

Why not? Is Buffet a soulless robot? Is there nothing he can do with $100 to derive a shred of utility, even if it's giving it to a homeless orphan for a smile?"

Why not? He has everything he wants.

Orphan, why not just helicopter $100 to him/her? The point is wealth/income equality matters.

"He thinks that every single financial asset is overvalued?"

That seems to be how he acts. He waits for the right price or right opportunity.

About being rational, he may take say .50% in a money market account for a little while then if the yield goes to say 2.5%, buy the bond.

[JP Koning]

Good post.

Do you think the Law of Reflux would prevent Helicopter Money from working under a gold standard?

[Nick Edmonds]

I don't see why helicoptering bonds would be any more distortionary than helicoptering money. The tax and transfer aspects are the same. And I don't think you have to assume that M is fixed - you could assume a fixed r for example.

[Nick Rowe]

JP" Thanks. Yes, for a small country. Because the gold standard is like a fixed exchange rate, where nothing the central bank does can work to change NGDP, unless it changes the exchange rate.

Nick E: take your case of a fixed r (it's simpler). There is some optimal/efficient level of r (you mean the real rate?). It's a relative price. If the central bank fixes it arbitrarily, the government will have to use helicopter/vacuum cleaner bonds to force saving to adjust to make the natural rate equal to that arbitrary rate. It's a bit like the central bank arbitrarily fixing the real price of peanuts, and then the government having to intervene in the peanut market to prevent booms or recessions. If you mean nominal rate, the government would need to use fiscal policy to make the inflation rate adjust to make neo-fisherianism true.

[baconbacon]

"Bacon - you are still making a big mistake. You are assuming that the marginal propensity to consume has been met prior to the HM. Furthermore, you are assuming that the marginal propensity to produce was at capacity - which it may or may not be."

@ HKO- look at hyperinflations. Real consumption falls, real production falls, money is literally left lying on sidewalks. These things happen during recessions when MP for consumption and production are below "capacity".

If you give a person free money are they likely to go into work more or less? If you get paid less for your work are you likely to go into work more or less? HM has both of these effects, individuals getting the money have less incentive to produce, and individuals selling them goods have less incentive to accept the local currency. You cannot talk about consumption effects without talking about production, consumption is 100% reliant on production.

[Nick Edmonds]

I'm not sure I agree, but I don't think it matters anyway. You say that for helicopter money to work it needs an increased NGDP target. What did you have in mind that the central bank was then doing with the interest rate? Now stick with that but replace the helicoptored money with helicoptored bonds (and the increased NGDP target). Does it no longer work?

[Too Much Fed]

"But this extreme (and very silly) example shows that money, as medium of exchange, is very different from any other consumer durable. If the central bank were giving away free fridges, and everyone already had one fridge, and only wanted one fridge, everybody would leave the free fridges lying on the sidewalk."

I don't think that would happen. If I had one fridge and did not want another, I would claim the free fridge. Next, I would decide if I want to spend now or later. If I want to spend now, I would sell the fridge for "money". If I did not want to spend now, I would either "hold" the fridge using it as a "savings vehicle" and sell it later, or I would sell it now and "hold" the "money" as a "savings vehicle".

This would also probably depend on storage costs and transaction costs.

[JKH]

“ They argue that Helicopter Money will be unwanted and must Reflux to the central bank to be held as central bank reserves, where those reserves pay interest and so are just like (very short-term) government bonds, or savings accounts at the central bank. Their argument rests on a fallacy of composition. Individuals in aggregate can only get rid of unwanted currency that way, but this does not mean that individuals will choose to get rid of unwanted currency that way. ”

I don’t see where they say that.

They define free lunch as the effect on consolidated fiscal cost - when helicopter money is assumed to permanent and at a zero interest cost.

Then they correctly state that this can’t be assumed unless interest rates are assumed to be zero forever (an imprudent assumption).

Then they correctly state that - if interest rates are not assumed to be zero forever (a prudent assumption) - then there is essentially no difference from the cost of conventional fiscal bond financing.

(Although they don’t consider the difference between interest on reserves and interest on bonds – which is a consideration due to the yield curve, but somewhat secondary to the main show)

I don’t think they mention reflux, or imply anything about it in the context of their free lunch analysis.

So this backs into the question of any difference between the stimulative effects (including reflex considerations) of bond financed transfers (bond financed drops) versus helicopter drops.

That's a different dimension of "free lunch", which I guess goes to Nick E's question.

So "free lunch" requires more careful definition. There are 2 interacting dimensions involved.

[JKH]

“Helicopter money is perfectly normal; central banks do it (almost) all the time. They print currency, the stock of currency grows over time, and since that currency pays no interest this is a profitable business for central banks and the governments that own them. And the governments that own central banks sooner or later spend those profits, by having transfer payments higher, or taxes lower, than they otherwise would be for the same level of government expenditure. Aside from the political question of the government deciding who the helicopter flies over, and when it flies, it is exactly as if central banks were doing helicopter money as a normal part of their operations.”

This is not correct.

You are identifying central bank profit as a form of HD.

But central bank profit - IN FACT - results from the debiting of bank reserve balances and the equivalent crediting of the capital account. Examine any scenario and that is what happens.

And those bank reserve balances - whatever their level - have resulted from either OMO or QE.

I see this argument in a number of places, and its not a good one in support of HD.

[JKH]

sorry - scatch that last comment - too quick

its the debiting of the treasury account at the central bank

[Ramanan]

“Helicopter money is perfectly normal; central banks do it (almost) all the time. They print currency, the stock of currency grows over time, "

Nick R,

While that's true, the argument is not that central banks don't print currency, it is that the fraction of the total deficit (or debt) which is financed in fraction of money and bond is endogenous. So that was the argument of the reflux guys. In recent times, central banks have started paying interest on reserves and now it's possible that the amount of deficit which is financed in money and bonds can be determined by the central bank and the government. However, the money stock (broad money) is still determined by the private sector. The central bank and the government's action do have an influence on the stock but it's still demand determined. Also reflux is just one part of the argument. Nobody is saying that reflux is the only mechanism in which "excess money" is eliminated.

[JKH]

Let me try that last comment again:

“Helicopter money is perfectly normal; central banks do it (almost) all the time. They print currency, the stock of currency grows over time, and since that currency pays no interest this is a profitable business for central banks and the governments that own them. And the governments that own central banks sooner or later spend those profits, by having transfer payments higher, or taxes lower, than they otherwise would be for the same level of government expenditure. Aside from the political question of the government deciding who the helicopter flies over, and when it flies, it is exactly as if central banks were doing helicopter money as a normal part of their operations.”

Assume that there is in fact a central bank profit. That profit accumulates as central bank capital and is then paid to the Treasury. Those two transactions are entirely internal to the central bank and they net to zero. Therefore, there can’t possibly be a current helicopter drop effect, because the central bank distributes nothing to the public as a result of that profit.

The immediate effect is that consolidated interest payments (interest on market held bonds and on bank reserves) are in fact lower than the counterfactual case of no central bank profit. That, if anything, is loosely analogous to (but not the same as) the reversal of a helicopter drop. Lower interest is lower income to the public.

I think your point is that spending capacity may be freed up in the future, relative to the counterfactual of zero central bank profit today, because today’s deficit is lower by the amount of central bank profit.

But the contribution of CB profits to a lower deficit is not evidence of helicopter mechanics. The CB currently just isn’t distributing money to the public on its own, and wouldn’t in the future under the same institional configuration.

CB profit today may facilitate the budget room for future government spending, but that has nothing to do with helicopter drops. The assumption of helicopter drops (as generally proposed) requires a change in the current configuration, in order to allow the central bank to make those payments from its own capital position, thereby driving the capital position negative and resulting in a loss. But that is not the case now. Which is one reason why central banks have profit to give back to Treasury. There are no helicopter drops occurring today - whether drops of principal or drops of interest.

[RN]

A vaguely related topic:

Where the heck is our economic brain/blog trust with regard to global yields going more and more negative and long term macro implications? This seems to me the most important topic by far, along with secular stagnation, and practically no one's talking about it among the blogoscenti.

[Too Much Fed]

Ramanan said: "However, the money stock (broad money) is still determined by the private sector."

Does the price inflation target apply to the lender of last resort function of the central bank to the commercial banks? Thanks!

[Too Much Fed]

For JKH, Ramanan, or anyone else, I am going to put this up and everyone can tell me how wrong I am (I assume).

"commercial banks use their reserve accounts at the central bank as the medium of exchange they use for transactions between themselves."

I don't think that is right. I think they still use demand deposits as the MOE and the central bank reserves only "clear the payment" between themselves.

[Tel]

baconbacon | June 07, 2016 at 02:44 PM

If you offered me a refrigerator on the condition that I put it in my picket and never use it, I would also reject that offer. Does that mean refrigerators are intrinsically useless.

The point is that I can easily keep the fridge AND also use it as a fridge at the same time. With money you either keep the money OR you spend it, but it's in the nature of money that the use value is tightly linked to getting rid of it. Thus, money is intrinsically different to a fridge.

That said, if I was offered a spare fridge which I don't immediately need then I'd probably take it anyway; just in case it might be useful in future. Maybe my fridge breaks down, and I need a replacement. Maybe the neighbours fridge breaks down and I can exchange my spare for some favour in return. Maybe the kids grow up and move out and they need a fridge. There's lots of speculative reasons to hold what you are not likely to use right now (offset by the largish storage cost of a fridge).

I might also point out that the reason people hold some money in liquid form (e.g. cash or whatever) is just in case they need to use it. They may have a desire to hold $100 in currency, but if they suddenly find themselves facing a tax payment or some high priority item, they will spend the $100 and catch it up later. The whole purpose is as a contingency against unknown future events.

[Ralph Musgrave]

I take it Nick Rowe now agrees with the policy pushed by Positive Money, the New Economic Foundation and Richard Werner for the last 5 years, namely that stimulus should come in the form of simply creating new base money and spending it (and/or cutting taxes) and that interest rates should be left to find their own level. Details of the latter three's ideas are here:

http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf

The latter policy is also very much in line with MMT thinking. At least Warren Mosler advocates a permanent zero interest rate, i.e. (like Milton Friedman) he doesn't seem to believe in fiddling with interest rates.

Plus Canada's Industrial Development Bank implemented the latter sort of policy in the three decades after WWII.

[Nick Rowe]

Ralph: "I take it Nick Rowe now agrees with the policy pushed by Positive Money, the New Economic Foundation and Richard Werner for the last 5 years..."

You take it wrong.