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Modern Monetary Theory going mainstream (kinda)

English: Portrait of Milton Friedman
English: Portrait of Milton Friedman (Photo credit: Wikipedia)

Article also posted online here.

Modern Monetary Theory, operating under other brand names, is starting to gain traction, interest, and legitimacy. Not just me and a couple of crazy academics who think there’s something there.

From this article in Bloomberg View, “Milton Friedman’s Helicopter Money is Looking Less Crazy.”

…the claim of Modern Money Theory that governments shouldn’t be afraid of deficit spending is gaining traction with some of the smartest people in the financial room.

What’s driving the conversation is a resurgence of interest in Milton Friedman’s idea of “Helicopter Money.” From an article “What is Helicopter Money” in World Economic Forum.

In the now famous paper “The Optimum Quantity of Money”, Friedman included the following parable:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

Friedman’s goes on to explain how doing such a seemingly insane thing  would not necessarily lead to hyperinflation; that it might have beneficial effects on an economy. But the silly name guarantees it won’t be implemented. Friedman was no marketing guy. Or maybe he was an antimarketing guy.

MMT’s mechanics are different than HM. MMT does not suggest dropping money from helicopters, notably. But in most practical respects, helicopter money seems entirely consistent with MMT. The differences are  mainly semantic, but there is a practical difference as well: Friedman defined helicopter money as a one-time event. MMT defines its equivalent as one of the ongoing tools of fiscal and monetary policy, and has a well developed theory (along with historical examples of use) to go along with it.

The nutty idea of “helicopter drops” was brought back into the mainstream by Ben Bernanke, who spoke about it in 2002. It was further legitimized in 2014, by a paper, “The Simple Analytics of Helicopter Money: Why It Works — Always” 
by Willem Buiter, chief economist for Citibank. Buiter’s paper argues that when applied “properly” it will increase demand and production and GDP and not lead to hyperinflation. The conditions for proper use are spelled out in his paper.

A 2014 article, “Send In The Helicopters,” in the Economist, also discusses it as a legitimate option.

Bernanke has recently published an article at Brookings on the subject. “What Tools Does the Fed Have Left? Part III Helicopter Money.” and that seems to have  prompted the latest spike in in interest in “helicopter money” as shown here in Google Trends.


Bernanke gives it a new, less stupid name: “Money-financed fiscal actions” or MFFAs and distinguishes between “money financed fiscal policy” policy as distinct from “debt financed fiscal policy.”


He’s pretty much accepting one of the wacko policy prescriptions of MMT. People are taking this seriously because  a) it’s originally Milton Friedman’s idea, and Milton’s not a wacko and b) Ben Bernanke is behind it, and he’s not a wacko, and c) the other tools of fiscal and monetary policy have failed just as MMT had predicted, and in the way that MMT had predicted. So maybe?

It seems that the time is nigh to start the discussion that leads to this as a real option as the suffering of “fiscally responsible austerity” is becoming unbearable for many.

Greg Ip in the Wall Street Journal writes “A Time and a Place for Helicopter Money

Helicopter money merges QE and fiscal policy while, in theory, getting around limitations on both. The government issues bonds to the central bank, which pays for them with newly created money. The government uses that money to invest, hire, send people checks or cut taxes, virtually guaranteeing that total spending will go up. Because the Fed, not the public, is buying the bonds, private investment isn’t crowded out.

Unlike with QE, the Fed promises never to sell the bonds or withdraw from circulation the money it created. It returns the interest earned on the bonds to the government. That means households won’t expect their taxes to go up to repay the bonds. It also means they should expect prices eventually to rise. As spending and prices rise, nominal GDP goes up, so the debt-to-GDP ratio can remain stable.

Technically, the government is not running the printing presses, a criticism of MMT. Instead, a Treasury issues bonds to its Central which then gives the Treasury money to spend. The bonds would bear interest which the government would have to pay to the Central Bank, but the Central Bank returns the interest to the government, so the net cost of the money ends up zero.

And the notion that this is not a guaranteed disaster is gaining credibility. The article continues:

In his book “Between Debt and the Devil,” which advocates helicopter money, the British economist Adair Turner cites Pennsylvania in the early 1700s, the U.S. Union government in the 1860s and Japan in the early 1930s as examples of governments that used monetary finance without triggering hyperinflation.

An even better example is World War II. The federal government had to borrow heavily to finance the war effort and the Fed helped by buying bonds to keep their yields from rising above 2.5%. Between 1940 and 1945, the Fed’s holdings of debt rose from $2.5 billion to $22 billion, an increase roughly equal to 9% of annual GDP. Though this only financed a fraction of the war, it was still debt monetization: most of those purchases proved to be permanent.

Discussion continues.

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