Atlas Sound Money Essay

Atlas Sound Money Essay-30
"Money from Heaven," image from GIF embedded in the post. src=download-history/0/3p "Helicopter money" started out as, and long remained, nothing more than a heuristic device — and a brazenly counterfactual one at that — employed by monetary economists as a means for gaining a better theoretical understanding of the consequences of changes in the stock of money."Suppose," the analysis went, that instead of increasing the monetary base by buying bonds in the open market, central banks dropped new supplies of currency from helicopters, thereby instantly increasing everyone's money balances.

"Money from Heaven," image from GIF embedded in the post. src=download-history/0/3p "Helicopter money" started out as, and long remained, nothing more than a heuristic device — and a brazenly counterfactual one at that — employed by monetary economists as a means for gaining a better theoretical understanding of the consequences of changes in the stock of money."Suppose," the analysis went, that instead of increasing the monetary base by buying bonds in the open market, central banks dropped new supplies of currency from helicopters, thereby instantly increasing everyone's money balances.

The same sort of thinking led the Federal Reserve, in the mid 1930s, to actually bank reserve requirements out of fear that banks might change their minds any minute and begin lending their hoards of cash. Of course, if spending had actually revived on its own, surpassing the level necessary to revive the economy, the Fed could have dealt with the "problem" easily enough, by reabsorbing excess money by means of bond sales.

The Fed's fears turned out to be exaggerated, to put it charitably: its decision actually helped to keep the U. Keynes had a good quip about Fed officials who worried, in 1936, about inflation: they “professed to fear that for which they dared not hope.” Let's hope that the Bank of Japan won't harbor such misplaced fears, and that it doesn't otherwise allow the liquidity-trap bogey to keep it from doing all it can to revive Japan's economy.

The choice of which money to use comes with tradeoffs and consequences.

Money that is costly to create has generally served as the more reliable form of currency, since the ability to create money inexpensively destroys the wealth of savers and hence the incentive to save.

Since even a zero interest rate on loans beats a negative return on reserves, the banks would have reason to lend even at zero rates.

For good measure, Goodfriend recommends that public currency holdings be taxed as well, so as to discourage hoarding by the public.Central banks, on the other hand, don't have to issue new money in exchange for securities or collateral owned by private financial firms: they can simply give it away to citizens, avoiding the middlemen.In Japan today, the strategy could work as follows: the Bank of Japan could announce its intention of giving away, say Y5000 (roughly U.The policy would assure Japan's citizen's that, one way or another, their money earnings were about to permanently increase, giving them ample reason to consume more.Given Japan's population, the promised rate of new money creation would increase Japan's monetary base by around ten percent after a year — a substantial rate, but not large compared to recent annual figures.For several decades afterwards, however, the issue was moot, as inflation replaced deflation throughout the world's economies.Only recently it has again taken on practical significance, with economists and Japanese monetary authorities pointing to Japan today as another instance of an economy faced with an insatiable demand for liquidity.Fearing that I was myself lapsing into clevernomics, I stuffed the essay into a file cabinet, where it has been buried ever since.All the recent writing on the subject has, however, emboldened me to resurrect my dusty old essay and to publish it here on I don't pretend that it adds anything to what recent commentators have had to say on the topic.Japanese consumer and producer spending has been shrinking for months, causing wholesale prices to decline and inventories to accumulate.The overnight call loan rate has hit zero, and short-term lending rates are at historically low levels.

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