Helicopter Money – Moon of Alabama

October 24, 2005

Helicopter Money

Bush today did selected Ben Bernanke to replace Alan Greenspan as Fed chairman. Bernanke is best known for his November 2002 speech Deflation: Making Sure "It" Doesn’t Happen Here.

[D]eflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place.
…
.. under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Bernanke says that in case of a recession -and the next one will come at some point in time for sure-, which could induce deflationary tendencies, he will support an all out effort by the fed, the banking system and the government to inflate the money supply early and in non trivial volumes.

Indeed one could argue that the fed has already taken some of the steps Bernanke did announce in that 2002 speech. In case of doubt, look at your bills and compare them to the bills you got at the time of the last Deflation Scare three years ago.

There is little experience on the effect of such intervention. The one that comes to mind is the Weimar Republic.

With Bernanke at the top of the fed, financial assets will not fall, but they will lose value. Prices will not fall either, but wages may well do so. But then, If You Don’t Eat or Drive, Inflation’s No Problem.

Posted by b on October 24, 2005 at 16:48 UTC | Permalink

Comments

Our property tax assessment is now based on “real values”, and just went up another **20%** this year, after the first “real value” bump in 2004.
This, of course, to cover the cutbacks in Federal
aid at the county level, drastic decline in local tax revenues as small-town economies collapse, and increased burdens, real and inflationary, that are being pushed down on the county level.
Of course, Bernanke had nothing to do, relatively speaking, with this Bush Reign of Terror Deficit, but Bernanke had a lot to do with easy credit, printing presses, hyper-inflation of commodities and real estate to avoid his deflation scenario.
Thanks to Bernanke, my US$-denominated savings are worth 40% less than when Bush took office, and I’m paying 40% higher property taxes, on a house and property that’s now five years *older*.
Hey, here’s an idea! Lend everyone $1M, so we can bid up the price of our homes above $1M, and then we can live in the lap of luxury and pay $40,000 a year in property taxes, and pay another $40,000 a year on the $1M deficit. What voodoo economics!
?!What in the hell are our children going to do!?

Posted by: tante aime | Oct 24 2005 18:07 utc | 1

This is off topic, but since Billmon is such a fan of Ahmad Chalabi, I thought I’d slip this in.
As reported in his first-person account, the Guardian correspondent kidnapped in Baghdad, Rory Carroll, reported that Ahmad Chalabi took credit for his release:
Ahmad Chalabi, the deputy prime minister, waited with a smile at his palm-fringed compound. Elements of Moqtada al-Sadr’s movement had snatched me, ostensibly to gain leverage for friends detained by the British in Basra, he said, though some wanted to sell me to jihadists.
He said his lobbying had clinched the release. “We got you out just in time.” It was over. I slumped into a seat. An aide fished a can of beer from his jacket pocket. “I think you’ll be wanting this.”
Endquote
Of course, my unworthy suspicion is that Ahmad could have engineered the grab–a seemmingly relaxed and amiable affair, though I’m sure Mr. Carroll didn’t feel that way at the time–so he could take credit for engineering the release and show Western journos that amid the chaos of Iraq there is one mighty dude who can get things done.

Posted by: Halcyon Days | Oct 24 2005 18:30 utc | 2

Interesting comments on Ben Bernanke from a good economics blog Mish

Posted by: Carl | Oct 24 2005 19:04 utc | 3

“Helicopter Ben” is an unfair epithet, I think. I always understood the message of that speech to be “don’t sweat the deflation.” That would be good, cuz we’re in for some, thanks to the switch to 7-10 amortization and to the Bankruptcy Abuse Prevention and Consumer Molestation Act, and you wouldn’t want Ben overreacting. That way lies hyperinflation.
For this reader, the unsettling part of the speech was the explanation of why Japan couldn’t seem to whip deflation: because it had shaky banks and profligate fiscal policy? That’s different than us how? We got banks stuffed with dregs of portfolio debt, legions of effectively unregulated mortgage lenders, and a burgeoning structural deficit with swinish fiscal policy fit for Mobutu’s Zaire.
Bernanke’s got one big choice to make: screw the last few savers to bail out all the debtors, or let the debtors hang. Either way it’s time for wholesale capital flight.

Posted by: psh | Oct 24 2005 22:38 utc | 4

tante, your absolutely correct about the reasons for local governments raising taxes. Bushie has diverted all the money from the states to his military machine. With deficit spending at an all time high, they are sucking the lifes blood from the states and the economy as a whole. The money is being funneled to a few friends and Iraq.
The new fed chair likely has been tapped to monetize the national debt. They monetize in a low profile manner, but you can see the results now. Commodity inflation has been running way as can be seen in gold prices. Their is clearly loads of inflation. A 3/4 inch sheet of tung and grove OSB was $29 last year, it came down to as low as $17 this summer, now its back at $27. The war is driving the commodity inflation more than anything. This same pattern started in the late 1960s with Vietnam and then when Nixon took the US off Brighten Woods, the dollar had to adjust causing inflation. Prices went up as the dollar became cheaper. To kill the 70s inflation Volcker snuffed the economy.
The difference this time is the new pool of labor in China and India will help keep inflation down while the debt is monetized. Delphi is the latest salvo.
To wrap up, the debt will be monetized, commodity prices will be sustained at a high rate until the war is over (and hurricane rebuilding is done), the rich will get paid more interest, and inflation will stay low on the workers back, no wage increases.

Posted by: jdp | Oct 24 2005 23:48 utc | 5

I’ve always wondered if its because altering the cost of money supply to effect inflation/deflation is appealingly counter intuitive, that monetarists swing this tool like a bludgeon, when in their opinion, things are going off-track.
I can just see how dropping the cost of money could be considered to be an effective weapon against deflation in a closed economy. Borrowing costs less so more people are inclined to borrow more money and spend more. A very blunt ax but it could work.
However when you put an economy largely supported by other currencies, combine that with vast public and private deficits, I can only see reducing the cost of money supply as being a further inducement to deflation.
A large proportion of those that hold US dollar securities are doing so because they choose to. There are a wide variety of reasons for this and although supporting a foreign economy in order to advantage your own economy’s terms of trade may be an appealing short term solution eventually even the shoeshine boys notice the regent’s unappealing lack of apparel.
But if the investment in the foreign economy is not only benefitting your terms of trade but also giving you ‘a nice little earner’ then propping up no-hopers becomes understandable if somewhat foolish.
If this Ben Bernanke chap decides to try and prevent the looming US recession by forcing down the Fed’s prime lending rates all he will succeed in doing is encouraging China, Saudi, Europe et al to reef the money outta the US and into somewhere that pays a better rate of return.
That would really exacerbate deflation and push US workers into further unemployment.

Posted by: Debs is dead | Oct 25 2005 0:06 utc | 6

Bernanke says that in case of a recession -and the next one will come at some point in time for sure

Yep.
Q1 2006, I would expect.
Accompanied by a nontrivial amount of CPI rise, courtesy of a Fed crew who never saw a pickle which they couldn’t at least try to print their way out of. My guess is that their next attempt will collapse the dollar another twenty percent or so.
I’m already picking out a soundtrack of bad disco music in anticipation of some good old Seventies-style stagflation.

Posted by: marquer | Oct 25 2005 1:19 utc | 7

Rep Bernie Sanders thumps Alan Greenspan
This must be heard to get the full brunt of the exchange, todays, Thom Hartman show played it today, so I’m sure you can find it in his archives. I rarely listen to Thom, glad I did today in the car.

Posted by: Uncle $cam | Oct 25 2005 1:49 utc | 8

Printing money is fine and this current lot are doing well at it, but Congress have got to fill up Dubyas cookie jar real soon now to see him through the mid term elections…. and they will.
The secret is, not to be in Weimar when it ceases to be a Republic.

Posted by: Edward Teague | Oct 25 2005 23:27 utc | 9

If you lost your job over the last five years and plenty of people have, then the recession/depression has started. At the Fleckenstein web site the writer has already given Bernanke an upgrade from helicopter money boy to B52 Bernanke as he’ll have to do some heavy sorties to keep the USS economy standing. In the Weimar inflation, the middle class was wiped out easing the path for the rise of their dear leader.

Posted by: christofay | Oct 26 2005 3:45 utc | 10

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