Parsing Waldman (3): Black Helicopters

Given the exchange of comments between Mr. Waldman and myself of the past two days, I would have written some of this post differently if I was writing it now. But the whole series was written before-hand. I will let it stand, but you should know that Mr. Waldman disagrees with some of what I wrote about his views.

And sir, I really appreciate your input. Thank you.

PS: I changed my mind and shortened the post a bit.


I was a bit critical of Waldman's post earlier in this series. Now, I will praise the post. I don't like his picture of past policy. But I do like his vision for the future.

But I should say I have some doubt whether the past Waldman presents (which I think is wrong) really is the view Waldman himself holds. He introduces that view by saying twentieth century monetary policy "can be" understood very simply.

Leads me to think his own view is somewhat less simple. I don't read much Waldman, but most of what I have read definitely falls in the "less simple" category. Anyway, that whole first part of his post was something of an intro to what he wants to talk about in his post. And he gets to that in paragraph seven:

Here’s my proposal. We should try to arrange things so that the marginal unit of CPI is purchased with “helicopter drop” money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public. During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle. We could reach the “zero bound”, but a different zero bound than today’s zero interest rate bugaboo. At the point at which the Fed is making no transfers yet inflation still threatens, the central bank would have to coordinate with Congress to do “fiscal policy” in the form of negative transfers, a.k.a. taxes. However, this zero bound would be reached quite rarely if we allow transfers to displace credit expansion as the driver of money growth in the economy. In other words, at the same time as we expand the use of “helicopter money” in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will “reduce credit availability”. The idea is to replace the macroeconomic role of bank credit with freshly issued cash.

I like it. This bit is exactly right: "we [must] allow transfers to displace credit expansion as the driver of money growth in the economy." And this bit is exactly right: "The idea is to replace the macroeconomic role of bank credit with freshly issued cash."

That's the thing about helicopter money: It's not credit. The big deal with helicopter money is *not* that you did nothing to get it. The big deal is that it doesn't belong to somebody else, who then charges you to use it.

I shouldn't say, because I wasn't there. But 150 years ago, when we used gold for money, a miner would find gold, bring it to the mint, and have it coined. There was no "assets and liabilities" nonsense. There was no double-entry crap. There was no debt involved in the process of money-creation. There was money.

That's what's missing today. Today, if we have money it's because we borrowed it. Or it's because we got it from someone who borrowed it, or they got it from someone who borrowed it. And somehow, we ended up with more debt than money. That's not good, because it takes money to pay off debt. That's why the helicopter drop is a good idea.

Almost all money today is "red" money, created by the use of credit. Helicopter money would be "black" money, created without credit. Money without interest charges. Money we don't have to pay back. The kind of money that reduces the debt-per-dollar ratio. And that is precisely what we need today.


"Rather than trying to fine-tune wages, asset prices, or credit," Waldman writes, "central banks should be in the business of fine tuning a rate of transfers from the bank to the public."

Waldman has this almost perfect. The Fed should be in the business of fine-tuning the balance between money and credit.

I argue that our anti-inflation policy is open-ended: as long as there is inflation, it is thought necessary to reduce the quantity of money. The trouble with that thinking is, that if something other than money is causing inflation, then the quantity of money might be reduced far more than it should be, and inflation may still not be brought to an end. I argue that this is exactly what happened in our economy.

In the early 1960s the quantity of money was just about right for the size of our economy. But credit-use grew too fast. Credit use caused inflation. Then, because there was inflation, the Fed restricted the quantity of money while Congress encouraged even more credit use!


In the Macroeconomic Resilience post, Ashwin quotes Axel Leijonhufvud:

The Quantity Theory was the only monetary theory with any claim to scientific status. But it left out the influence on the price level of credit-financed demand.

Policy still leaves out "the influence on the price level of credit-financed demand". U.S. economic policy restricts the quantity of money in circulation to fight inflation. But it encourages the use of credit to stimulate growth, and it encourages the use of credit even when inflation threatens: No tax deduction for interest expense or for any spending is ever put on hold by Congress simply because the Fed happens to be raising interest rates. Credit-use is always encouraged.

This is why debt accumulated until it broke the economy. This is why we need today the helicopter drop of black money, interest-free money: to counter-balance the excessive accumulation of debt and to reduce the debt-per-dollar ratio.

However, we also need to reduce the debt-per-dollar ratio by reducing debt... by reducing private-sector debt, the debt that holds back private-sector growth. We must reduce this debt in order to fight inflation, because the helicopter drop does not deal well with inflation.

As Waldman says:

In other words, at the same time as we expand the use of “helicopter money” in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will “reduce credit availability”. The idea is to replace the macroeconomic role of bank credit with freshly issued cash.

The idea is to replace the macroeconomic role of bank credit with freshly issued cash.