Excellent.
At Reuters, Kaletsky writes:
Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective.
Suppose the new money created since 2009, instead of propping up bond prices, had simply been added to the bank accounts of all U.S. and British households. In the U.S., $2 trillion of QE could have financed a cash windfall of $6,500 for every man, woman and child, or $26,000 for a family of four. Britain’s QE of £375 billion is worth £6,000 per head or £24,000 per family. Even if only half the new money created were distributed in this way, these sums would be easily large enough to transform economic conditions, whether the people receiving these windfalls decided to spend them on extra consumption or save them and reduce debts.
Distributing money to the general public was the one response to intractable recessions and liquidity traps that united Milton Friedman and John Maynard Keynes. Their main difference was that Friedman proposed dropping dollar bills out of helicopters, while Keynes suggested burying pound notes in chests that unemployed workers could dig up. Unfortunately modern economics, based as it is on simplistic and misleading assumptions about self-stabilizing markets, has forgotten the insights of these great students of deep economic slumps. In today’s world of electronic money, we would not even need Friedman’s helicopters or Keynes’s ditchdiggers. Just a few lines of computer code – plus some imagination and courage from our central banks.
Suppose the new money created since 2009, instead of propping up bond prices, had simply been added to the bank accounts of all U.S. and British households. In the U.S., $2 trillion of QE could have financed a cash windfall of $6,500 for every man, woman and child, or $26,000 for a family of four. Britain’s QE of £375 billion is worth £6,000 per head or £24,000 per family. Even if only half the new money created were distributed in this way, these sums would be easily large enough to transform economic conditions, whether the people receiving these windfalls decided to spend them on extra consumption or save them and reduce debts.
Distributing money to the general public was the one response to intractable recessions and liquidity traps that united Milton Friedman and John Maynard Keynes. Their main difference was that Friedman proposed dropping dollar bills out of helicopters, while Keynes suggested burying pound notes in chests that unemployed workers could dig up. Unfortunately modern economics, based as it is on simplistic and misleading assumptions about self-stabilizing markets, has forgotten the insights of these great students of deep economic slumps. In today’s world of electronic money, we would not even need Friedman’s helicopters or Keynes’s ditchdiggers. Just a few lines of computer code – plus some imagination and courage from our central banks.
Or suppose that rather than simply giving money away to people, the money was used to pay down debt for those same people. This solves the debt-deflation problem. It helps people do the main thing we want to do: deleverage.
It increases demand by freeing up income that had been used for paying down debt. And it solves the problem of private sector debt overhang.
In other words, it is the way to restore vigorous economic growth.
2 comments:
I assume that there is some model that suggests that bonds have future cash flow, where giving away money or forgiving debt has no economic value to banks. This may hit the hammer on the head in terms of understanding why our society is locked into this retarded game of corrupted bankers playing games with derivatives -- versus having a system that actually stimulates real labor output. In retrospect, many social programs are social contracts that provide stability to society -- so where did that go wrong, i.e., why isn't there future value in employment?
DH
HMN -
You are missing the point. Bankers don't give a rat's ass about real labor output. Derivatives pour money into their already over-stuffed pockets. There is no social contract. Only greed.
Art -
Your points are well taken.
The reason QE is policy is the belief that spending results from a wealth effect. I think I pretty effectively skewered that idea, and showed that spending is an income effect.
http://www.angrybearblog.com/2012/01/wealth-vs-income.html
http://www.angrybearblog.com/2012/02/income-and-consumption.html
http://www.angrybearblog.com/2012/03/1-spending-as-fraction-of-net-worth-tim.html
Debt relief is good. Preventing future debt is also good.
JzB
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