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Another New Thought: Helicopter money and fiscal rules
Submitted by Old and Gray on Fri, 06/10/2016 - 18:46
by John Muellbauer
John Muellbauer, Senior Research Fellow, Nuffield College; Professor of Economics, Oxford University; and Senior Fellow, Institute for New Economic Thinking, Oxford Martin School.
His article was posted on voxeu.org 10 June 2016
The preceding article is a puzzle; either the author/professor disbelieves German Weimar 1920s history, preferring to believe Jung’s psychological analysis of events rather than the parallel of research by an historian, Andrew Dickson White, into the French inflation of the late eighteenth century, or, the Professor has never been exposed to standard teachings of monetary policy by the economic profession or discipline. For all the interaction and obfuscation from economists and politicians, this puzzle does not require a difficult or complex solution if the reader can stay with us to the end of this entry.
About the question about Prof. Meulbauer’s helicopter money: did he not hear of the George W. Bush similar “helicopter money distribution” the 300 USD distribution per taxpayer? Doctor, it was utter failure! Would the failure be attributed to the timing in the historic timeline, the sum of money involved (the more recent suggestion is 500 euros, considerably more than W distributed), Add in the cultural differences of Germans penchant for being less investment prone, more savings oriented, with lower prices in general and 500 euros does add up to a great deal more than W. envisioned. And, lest we forget, the Bush distribution was instituted through the tax system. If no taxes were paid, no benefits accrued. (The reminder was missing, but the message was: “Don’t forget this - next election? at the ballot box?”)
Still, that is not the “helicopter money” considered by either Friedman or Bernanke, their suggestions were a good deal more profligate as well as desultory. If helicopter dumps numbers one, two, three and four do not work, neither will five, six, seven or eight. That was the French Fiat lesson of the late eighteenth century, proposed by the most sincere of the French heroes of the day, who paid dearly for their patriotic efforts, which suggested to their successors that the next drop should be larger. The rabble was an angry, impatient lot.
We may have an advantage to the outlook on the proposal here on Duff’s, having been introduced to A. D. White’s ”Inflation in France” complete with documentation and his simple arithmetic of consequence (which should be understood by everyone with or without a degree) accompanying the text courtesy of Veteran Lender’s introduction; but even if that’s an advantage we enjoy over the professor’s education or experience, common sense should dictate that inflation does not respond as expected nor can it go on forever, multiplied under uncontrolled circumstances with no concern about the future. The fact that the past five years has suffered subdued growth, which in turn inhibits attempts to invest the already QE distributed extra “helicopter money”, or keep it safe from normal circulation, that is - safe from normal contact with markets or the supply/demand environment - does not mean all money has changed its nature and will not suddenly leap out of its dormant state and corrupt the economic scene the minute it is released from its restricting bondage. And, we have discovered that the one-time distribution was accepted as such and was not accepted by the Americans as an invitation to rush down to the nearest Wal-Mart and splurge on the devices that would have filled the gap and brought about instant recovery. . . which, whatever their reputation suggested, they did not accept as dictum.
Despite the difference in German habits and customs, expectations should not surpass the historical US results a few years back.
Money at work under current circumstances, which include reticent investors (witness the subdued volume on the NYSE and elsewhere and the suggestions of fewer IPO offerings, etc.) as well as the uncertainty exhibited in fluctuation of the exchange imbalances (with Japan and China leading the way ) and attempts to control credit expansion through fiscal policy (the recent flawed attempt through the Eurozone “fiscal austerity experimentation” which helped generate their present condition) have not responded to normal expectations because we simply are not normal in historic terms when we depend on finance to provide goods for the market and dominate the economy! (That is something still waiting to confront us in the very near future.) The pipeline has just recently shifted, the strengths or weaknesses have not yet been fully tested, and when they are, we’ll discover they cannot satisfy requirements for a global population growth not yet fully calculated, appreciated, or recognized.
We are running out of fuel and the economic engine is sputtering!
We’ve been besieged with ideas of negative interest outwardly without mention of who is to be subjected to the tithes levied through the process. Undoubtedly, it will fall on the lower brackets! All responsibility falls on the lower bracket.
The idea of larger batches of helicopter money already delivered to the larger entities and the well-heeled, tried and found ineffective in the QE rounds, is beginning to find a new batch of devotees globally. Investment advisors are beginning to devise half-baked ideas of quick maneuvers with money a la South American style of a few decades ago – (with recent revivals underway) - of avoiding the effects of hyperinflation, by taking the time off from work to rush down to the local bank or broker to invest, cancel, withdraw or reinvest or redeposit money to guard against loss, in the fitful and panic-driven attempts to save the family fortune. What was once good (but ineffective) for them then is now good enough and will be effective for the rest of the world?
Here’s an observation which may be of some value: that ploy had half a chance in the past when domestic funds under stress could be moved to relatively unaffected global areas before full dedication to “globalization” was in place; but, now globalization has leveled the advantages and when one nation experiences difficulties, since we’ve grown so interdependent, there is little chance of finding a region or section of the globe that does not suffer consequences. Which means your money is not more or less safe elsewhere.
Today you’ll be reading more little ads and blurbs – and tomorrow you’ll be inundated with them - indicating that globalization is a “good thing” suggesting we should all embrace it and be grateful we live in the best, most interactive of all possible worlds. . . for those sitting at the controls, of course! This opinion is advanced on the basis of recent economic papers which “prove” that shocks are transmitted from one point to another such as one bank to another, or one competitor to another, or one nation to another if not at electronic speed, the flaw is simply due to the switch not being flipped on this morning – nothing else. Given that banks are no longer restricted to simple localities, or function only within the boundaries of a single nation, that transmission is instantaneous rather than “delayed” by transmission by the grace and glory of technology.
Why should this happen? Why do we reject the proofs of history and turn down the wrong lane again and again? Is it unwillingness to admit that our guiding science is flawed or mistaken? Or, could it be simple stubbornness? If it’s one or the other what’s the difference? Do the adherents to the discipline have the magic powers to overturn native inclinations of the human race? If so, that is hardly a convincing argument.
The previous O&G thread without comment leading to the Bill Gross blogsite with the hope that it might stimulate some insightful comments still sits there as a challenge. It is part of the future envisioned for us, proposed for us in desperation, holding onto what someone has gained to this point, trusting that someone still has your interest in mind that all is not lost, there is another way out of these dark days.
It’s a long shot that it could ever be so, because any assets sold today for the sake of the safe feeling of cash in hand (which may be the prevailing thought among financial advisors today) will suffer disappointment when the cash dissipates into hyper-devaluation and the assets subsequently multiply in value – under the same impetus.
But, that should be no consolation; if we were all to follow that path, it’s another episode of concentration, everyone shifting to the same side of the boat - we’ll be rich in assets having no markets.
Of course, we could skip it all by just providing the only means we have of saving the entire world from this debacle – raise taxes. . . the bugaboo to be shunned as worse than death. All this searching for a way out is nothing more than an end run around taxation – and the threat is not in the ledger, it’s at the ballot box.
Negative interest rates, austerity, neglecting population growth, switching our paradigm from production to finance and the mess it’s created - - every bit of what you see and what’s to come, has to do with avoiding taxes for those who proportionally own too much already. The specter of multi-billionaires with more than enough assets to bring a nation to its knees inspires the rest of us to genuflect in their direction? Or, imitate them?
A breath-taking, awe-inspiring thought, is it not?