Without providing a link, ZeroHedge posted some comments today regarding “Helicopter Drop Theory” by Willem Buiter, Citibank’s Chief Economist.
Willem Buiter on Failure of Monetary Policy
We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.
The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.
To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.
Economic Illusions vs. Reality
I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.
With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.
- Brought demand forward at the expense of future GDP
- Encouraged more leverage
- Increased speculation in financial assets
- Created bubbles in equities and bonds
- Mistook economic activity for what much of it really is: malinvestment
The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.
Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.
Willem Buiter Proposes Helicopter Drop
“Helicopter money drops (what else?)”
Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.
This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.
The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with “emergency” levels of asset purchases and interest rates becoming the norm.
If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue.
Myth of the Deflation Monster
Buiter wants to slay an imaginary monster, deflation.
He moans “Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990.”
Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?
The answer is: None.
The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?
The answer once again is: None.
Nonetheless Buiter wants the ECB to pursue the same inane path.
There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.
Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.
But economic illiterates don’t resign, they just keep promoting policies that both common sense and history show can never work.
Challenge to Keynesians
The simple fact of the matter is “Inflation Benefits the Wealthy” (At the Expense of Everyone Else) .
If Buiter disagrees, he can respond to my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit”
Mike “Mish” Shedlock