Courtesy of The Automatic Earth.
DPC Post and Montgomery, corner of Market, San Francisco post quake Apr 1906
Courtesy of Tyler Durden comes a 22,000+ word ‘essay’ from Mark Blyth and Eric Lonergan at the Council on Foreign Relations (yes, those fine folks) on how and why swaths of dough should be handed to the man in the street. But that’s not what the CFR stands for, so this calls for deconstruction, if not demolition.
It might be a really good idea if money were handed out to the real economy instead of a bunch of banks. It might be better if central banks would just leave the economy be. But that’s not what the CFRs of the planet want: they want governments and central bankers in every aspect of our lives.
They want full control. And they pretty much already have it. If they offer us free money on top, we’ll sing their praises in temples. But we’ll come to regret the whole thing more than we have any idea of. We can do just fine if they just stay out. Still, once you’ve granted people power over others, especially large numbers of them, they’ll be very reluctant to let it go.
And they’ll end up squeezing the living daylights out of you and yours. It’s how nature works. These tendencies and instincts don’t stop of their own accord, they need to be stopped from some place outside of themselves.
Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People
Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance.
Questions right off the bat: Isn’t ‘insufficient spending, whatever it may mean, a problem that stems from people not having enough to spend? What exactly does it have to do with governance? Isn’t it just as likely that governance is the cause of not having enough to spend?
And how would one define ‘insufficient spending’ to begin with? Is this where people can’t buy enough food for their children, or is it where GDP growth fails to meet economists’ models? And don’t tell me those are the same thing.
Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse.
It’s well past time, then, for U.S. policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality.
First of all: why should policymakers do anything at all? Why shouldn’t they just retract from the markets other than in a regulatory sense, meant to protect the weak from the rich, and prey from predators? What role do central banks or governments have in that?
Is all we can take from this that what they’ve done is simply the wrong policy, and now they should switch to another, thought up by economists? Why do we need any such policy? Why isn’t that the first and central question? Am I missing something?
Next, note, in the following, how the authors entirely avoid the question whether governments and/or central banks SHOULD try to boost spending; for them, that’s a done deal.
In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter.
Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time [..] Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.
Yeah, but why would we want central banks to cut interest rates with a phone call? What good does that do anyone other than those who already make money like water?
Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles – in real estate, for example – and encourage companies and households to take on dangerous levels of debt.
Well, yes, low rates suck in people into borrowing for homes they can’t afford, making those same homes even less affordable. Not rocket science. And they kill those same people’s pension plans.
And that’s what the Oracle describes here:
That is precisely what happened during Alan Greenspan’s tenure as Fed chair, from 1997 to 2006 [..] Greenspan was completely honest about what he was doing. In testimony to Congress in 2002, he explained how Fed policy was affecting ordinary Americans:
“Particularly important in buoying spending [are] the very low levels of mortgage interest rates, which [encourage] households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures. Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well.”
Translation: How to suck in all the greater fools you can find, since there’s money to be squeezed out of them and at the same time they’ll believe the economy is doing fine, for a while longer.
Greenspan’s model crashed and burned when the housing market imploded in 2008. Yet nothing has really changed since then. The United States merely patched its financial sector back together and resumed the same policies that created 30 years of financial bubbles. Consider what Bernanke did with his policy of “quantitative easing.” Bernanke aimed to boost stock and bond prices in the same way that Greenspan had lifted home values. Their ends were ultimately the same: to increase consumer spending.
Really? That’s what Bernanke was shooting for? Increase consumer spending? And Greenspan too? You sure they weren’t just trying to boost bank profits? And no, they’re not even remotely alike.
Higher asset prices have encouraged a modest recovery in spending, but at great risk to the financial system and at a huge cost to taxpayers. Yet other governments have still followed Bernanke’s lead. Japan’s central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo’s efforts have failed to counteract the country’s chronic underconsumption. In the eurozone, the European Central Bank has attempted to increase incentives for spending by making its interest rates negative, charging commercial banks 0.1% to deposit cash. But there is little evidence that this policy has increased spending.
I don’t think Japan followed Bernanke, it’s the other way around. That neither increased spending is obvious. That neither aimed to achieve that is less so, but it does fit the evidence (just not the PR).
Know what would be scary? if these policies HAVE increased spending, and we’re still where we are today. That would mean we’re in far deeper doo than we ever considered.
China is already struggling to cope with the consequences of similar policies, which it adopted in the wake of the 2008 financial crisis. To keep the country’s economy afloat, Beijing aggressively cut interest rates and gave banks the green light to hand out an unprecedented number of loans.
What will be the result in China? All out civil war, or just very many very bloody local battles? The jury’s still out, but things ain’t looking good.
The broader global economy, meanwhile, may have already entered a bond bubble and could soon witness a stock bubble. Housing markets around the world, from Tel Aviv to Toronto, have overheated. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending.
They don’t just believe it; their debts are too high. What happened to make debt a matter of faith?
Over the past 15 years, the world’s major central banks have expanded their balance sheets by around $6 trillion, primarily through quantitative easing and other so-called liquidity operations. Yet in much of the developed world, inflation has barely budged. To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero.
Why do we want inflation (or, what these people really mean, rising prices)? What use is it? If prices rise, we have less debt? So we can create more of it? What an infantile model that looks to be, and yet everyone wants a share.
As for “low inflation occurs when people and businesses are too hesitant to spend their money”, that’s dead on (but gets lost among all the other jibber jabber): the inflation rate is directly – we’re talking umbilical cord – connected to spending, which is connected to what people actually possess, not what ‘authorities’ or banks allow them to borrow, that’s just a passing phase.
This so-called “rising prices ‘inflation’” is low because the velocity of money is at about historical lows. And it is because people have gotten a lot poorer over the past decade. Getting them deeper into debt won’t fix that. How is that still not clear?
Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money.
“Handing consumers cash directly” hardly seems a job for a central bank, but it’s sure better than handing it to banks directly.
The government could distribute cash equally to all households or, even better, aim for the bottom 80% of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
Now we’re talking. Though I fail to see how you could maintain a healthy economy by just handing out money. Other than a basic income for every citizen, but that’s a whole other concept altogether.
Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates. And rate changes are just as redistributive as cash transfers. When interest rates go down, for example, those borrowing at adjustable rates end up benefiting, whereas those who save – and thus depend more on interest income – lose out.
No they’re not; “rate changes are just as redistributive as cash transfers” only for those who borrow.
[..] … critics warn that such helicopter drops could cause inflation. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects, although they probably wouldn’t have to do the latter: in recent years, low inflation rates have proved remarkably resilient, even following round after round of quantitative easing.
Wait, the idea evolves into something where a veiled wizard yanks a crank whenever (s)he see fit, and controls everybody’s lives that way. How scary does it get?
… the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings – in the form of currency reserves – as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in [..]
When people save, they spend less than they could. This is distorted, if not perverse. We should push everyone to spend all they have, and then get them to borrow so they spend more than they have? So no-one will have any savings left, but instead be indebted? That’s an economic model?
… throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). As a result, middle-aged adults and the elderly have started spending less on goods and services. These structural roots of today’s low inflation will only strengthen in the coming years, as global competition intensifies, fears of financial crises persist, and populations in Europe and the United States continue to age. If anything, policymakers should be more worried about deflation, which is already troubling the eurozone.
There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, helicopter drops would require the banks to print much less money. By depositing the funds directly into millions of individual accounts – spurring spending immediately – central bankers wouldn’t need to print quantities of money equivalent to 20% of GDP.
Ha! We’re finally getting to the core of the issue!
The transfers’ overall impact would depend on their so-called fiscal multiplier, which measures how much GDP would rise for every $100 transferred. In the United States, the tax rebates provided by the Economic Stimulus Act of 2008, which amounted to roughly 1% of GDP, can serve as a useful guide: they are estimated to have had a multiplier of around 1.3. That means that an infusion of cash equivalent to 2% of GDP would likely grow the economy by about 2.6%. Transfers on that scale – less than 5% of GDP – would probably suffice to generate economic growth.
Win-win. Right?
[..] … instead of trying to drag down the top, governments could boost the bottom. Central banks could issue debt and use the proceeds to invest in a global equity index, a bundle of diverse investments with a value that rises and falls with the market, which they could hold in sovereign wealth funds. The Bank of England, the European Central Bank, and the Federal Reserve already own assets in excess of 20% of their countries’ GDPs, so there is no reason why they could not invest those assets in global equities on behalf of their citizens.
After around 15 years, the funds could distribute their equity holdings to the lowest-earning 80% of taxpayers. The payments could be made to tax-exempt individual savings accounts, and governments could place simple constraints on how the capital could be used.
Wait! 15 years? Where did that come from? I thought you were going to give people money to spend tomorrow morning?! Moreover, how does this prevent the funds from being annihilated through falling markets? And who will manage the money? Goldman Sachs anyone?
For example, beneficiaries could be required to retain the funds as savings or to use them to finance their education, pay off debts, start a business, or invest in a home. Such restrictions would encourage the recipients to think of the transfers as investments in the future rather than as lottery winnings.
A 15 year wait would not immediately boost spending, I would venture. By the time the funds would be available, the economy could well be all but gone. Let alone the funds, you geniuses.
Best of all, the system would be self-financing. Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a 5% real rate of return – a conservative estimate, given historical returns and current valuations. Thanks to the effect of compound interest, the profits from these funds could amount to around a 100% capital gain after just 15 years.
Say a government issued debt equivalent to 20% of GDP at a real interest rate of zero and then invested the capital in an index of global equities. After 15 years, it could repay the debt generated and also transfer the excess capital to households. This is not alchemy. It’s a policy that would make the so-called equity risk premium – the excess return that investors receive in exchange for putting their capital at risk – work for everyone.
This all, obviously, depends on the potential returns of the equities the funds are invested in. Alchemy or not. What happens when the return is negative?
As things currently stand, the prevailing monetary policies have gone almost completely unchallenged, with the exception of proposals by Keynesian economists such as Lawrence Summers and Paul Krugman, who have called for government-financed spending on infrastructure and research. Such investments, the reasoning goes, would create jobs while making the United States more competitive. And now seems like the perfect time to raise the funds to pay for such work: governments can borrow for ten years at real interest rates of close to zero. The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy.
But a fund that takes 15 years to pay out does not take ‘too long to revive an ailing economy’?
[..] large, long-term investments are needed. But they shouldn’t be rushed. [..] Governments should thus continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly. [..]
Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances – but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.
So, your government hands you a gift, and then yanks it right out your hands again, with the promise to take care of it better than you ever could. How’s that different from what we already have?
Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. [..] in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices.
But your guys idea is not to transfer anything to the people. You want people to spend more than they would have because there’s a pot of gold waiting for them beneath a 15 year rainbow.
They would also would help address inequality – without skinning the rich.
What, we don’t want to skin the rich?
By the way, how much money would you CFR guys want to hand out? Did you mean 20% of GDP for one year, or would you prefer 20 years? Just asking.
