The Bank Of Japan Forced Into The Helicopters? Troubling Questions For Macroeconomists

A Benjamin Cole post

Under the stalwart but still cautious leadership of Governor Haruhiko Kuroda, the Bank of Japan has followed a path of quantitative easing, and then negative interest rates, in a mixed battle against deflation and a soaring yen.

Yet in mid-August the yen rose to less than 100 per U.S. dollar, from 120 at the start of the year. Meanwhile, Japan plays peek-a-boo with deflation.

And now the Bank of Japan may be running out of Japanese government bonds to buy. With the BoJ having purchased one-third of the national bonds outstanding, the largest banks in Japan say they are running out of inventory.

Moreover, the BoJ has been buying exchange-traded funds (ETFs). “Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings,” reported Bloomberg recently.

No doubt, critics will cite Japan as an example that QE does not work. But we don’t know the counter-factual, and it is probable Japan would have sunk into recession-deflation without QE.

But perhaps the long-term critics of QE, who have predicted inflationary holocausts for years, finally have a real issue: The BoJ will run out of securities to buy. Although in a laughable twist, the BoJ will run out of securities to buy long before it “runs of out ammo,” says one of the other long-standing if insane critiques of QE. The BoJ has unlimited ammo.

Sikorsky, Huey, Chinook

The Bank of Japan could sidestep the whole problem of building a balance sheet by instead engaging in “helicopter drops” also called “money-financed fiscal programs.”

Though rarely discussed in U.S. macroeconomic circles, Japan used helicopter drops successfully in the Great Depression, under the leadership of Finance Minister Korekiyo Takahashi. While American and Europe remained mired in depressions until WWII, Japan’s economy grew solidly from 1932 to 1936, when Korekiyo was assassinated by militarists. The island economy kept growing thereafter, but ran into inflation, as the soldiers kept printing money to finance wars.

Conclusion

Who in 2008 could have predicted that central-bank quantitative easing programs on three continents would be met by whimpering bond markets, zero-lower bound and borderline deflation through much of the developed world?

Who can deny that the Bank of Japan has paid off one-third of the once-towering Japanese national debt, with no inflationary consequence? So what is the importance of the national debt in this new context?

What recourse has the Bank of Japan now, but to ponder helicopter drops?

Orthodoxy and convention have nearly ossified the craft of macroeconomics. Practitioners genuflect to totems even as events make a mockery of the most exalted maxims.

Do the Rube Goldberg operations of the Federal Reserve, with bond-buying and selling, and reverse repos, and interest on excess reserves, and erratic posturing by various unelected regional bank presidents, make more sense than a simple program of money-financed fiscal programs?

PS A real world experiment:

It is quite unfortunate that Schacht’s lesson was lost while Eucken’s paradigm carried the day. Schacht’s programme resembles a variation of the ‘helicopter money’ policy and its free-lunch effects (Bossone 2016), which several economists today consider an effective demand management tool for fiscally constrained economies trapped in deep depression.

Ed Yardeni Ponders Stagnant Demand And Weak Productivity

A Benjamin Cole post

Ed Yardeni, of Yardeni Research, is one of those names that have banged around U.S. macroeconomic circles for generations, always grounded in the numbers for his observations.

So why the cruddy productivity numbers of late?

Here’s Yardeni, from his last blog post:

Another possible explanation is that, from a supply-side, companies are highly productive. The problem is that in a world of secular stagnant demand growth, their unit sales aren’t strong enough to show off their productivity. You may have the most efficient widget factory in the world, but if no one wants widgets, your productivity is zero. Consider the following:

 Lots of capacity. There are lots of industries and companies with too much unproductive capacity. Some have expanded too much with the help of cheap credit. Some have been disrupted by competitors using new technologies. I just can’t find too many industries that haven’t spent enough money on plant, equipment, and technology. Indeed, the industrial capacity utilization rate has dropped to 75.4% during June from a recent peak of 78.9% in November 2014. What’s puzzling is that the employment rate (which is the flip side of the official unemployment rate) has risen to 95.1% from 94.2% over this same period.

Yardeni is correct, the world is glutted with capacity, a glut that appears to be worsening, and also glutted with capital to make new capacity if needed. Yardeni is right that weak demand will drive down output per worker. It may also be that labor is cheap enough in the USA—with people returning to the labor force—that raising productivity is not a priority for American businesses.

Central Banks Out of Ammo?

Seeing what the federal government accomplishes, domestically and offshore, many fear more federal spending as a form of stimulus.

That throws stimulus-backers back on our central bank to boost demand.

With interest rates low already, likely lowering rates more can only do so much, although they should be lowered.

The real choices come back to QE or helicopter drops.

Sikorksy Time

The Fed is not out of ammo, but it lacks resolve.

What to make of it when a Michael Woodford, or a Ben Bernanke, or a Lord Adair Turner says helicopter drops will work—but the Fed will not send in the choppers? Bernanke says chopper drops will work, but should be a last resort.

But why not now? What is the point of perennially soggy growth and low productivity, and the Japanification of the Western World?

Why not a few years of boom times, and then deal with whatever inflationary consequences there may be, if any?

The Fed Has Painted Itself Into A Corner? They Need A Helicopter Rescue

A Benjamin Cole post

Fed officials speak copiously and continuously about their unfulfilled urge for higher interest rates. This is a deep desire that U.S. central bankers were able to somewhat satiate from the early 1980s to 2008.

It is true that through much of the 1980-2008 period many Fed-rate increases led to lower inflation, and to weaker growth and sometimes recession, leading to lower interest rates. Rates were in long-term secular decline, but there were those euphoric passages (for central bankers) when rates could again be boosted, as during any economic recovery.

But, as Milton Friedman noted, 1) a central bank cannot tighten its way to higher interest rates forever, and 2) nominally low interest rates are a sign that money has been tight.

A couple generations of money-tightening has produced predictable results of low interest rates, low growth, as well as miniscule inflation.

The Fed is presently trapped. The central bank has little grip on long-term rates, now near historic lows. So raising the Fed funds rate and interest on excess reserves (IOER), will only dampen long-term rates again, the opposite of what the Fed says it wants.

IOER

And then there is the tar baby the Fed tossed into the corner into which it then painted itself: IOER.

Banks make money “on the spread,” that is the difference between borrowing costs and lending returns, usually about 300 basis points. Banks have overhead, labor costs, fancy HQs so that spread gets cut thin on the way to the bottom line.

But now banks collect 0.50% on IOER, the same reserves hugely swollen by QE. The Fed is eager to boost that to 0.75% soon, and possibly even higher in the 12 months ahead.

At some point it will make sense to banks to do nothing.

IOER may be one reason why U.S. commercial real estate loan volume only reached 2007 levels again in late 2015. Actually, 2016 has been a decent year for commercial real estate loan volume—finally eclipsing 2007 levels—but if the Fed raises IOER again, perhaps the IOER will be higher than the profit on a commercial property loan. The banks can go golfing on the 0.75% they make for keeping money in the vault.

Nirvana for central and commercial bankers at last!

Yet this problem of IOER-addled banks is doubly important, as many say it is banks that expand the money supply, when they extend a loan. Before QE, the main creation of new money was through bank lending, and banks primarily lend on real estate.

This gets into the whole exogenous v. endogenous expansion of the money supply dispute, which can put any sane person into knots for days.

But suffice it to say, the Fed is following a reckless and suppressive mission with a view towards higher IOER. The money hose could run dry long before the Fed could arrange tools to replenish the supply.

Paying banks to do nothing is an imprudent and dangerous precedent, and of course, only banks will closely monitor and lobby this IOER issue going forward. Like any federal dope, it will quickly become addictive.

Conclusion

The Fed likely should have never paid IOER.  But what is done is done. This makes the quantitative easing (QE) option going forward more problematic, as banks will accrue even more indolence-inducing reserves.

But the US will enter recession again someday, and likely with interest rates near or lower than today’s levels.

Really, the only recourse is to the helicopters. And that begs the question: Why wait until there is a deep recession again? How about preventative air drops anytime core-PCE dips below 2% YOY?

Or, better yet, whenever NGDP growth drops below 5%?

Raghuram Rajan: A Globalist Who Supports Helicopter Drops? David Beckworth Should Podcast Rajan

A Benjamin Cole post

With the insouciance of a true international central banker, Raghuram Rajan, the outgoing Governor of the Reserve Bank of India recently opined in Project Syndicate that “what we need are monetary rules that prevent a central bank’s domestic mandate from trumping a country’s international responsibility.” here

You might think the transcontinental University of Chicago grad Rajan has in mind tighter money everywhere and always, because a looser monetary stance would lower the exchange rate of a nation’s currency, and that is a “beggar thy neighbor” policy.

But maybe not.

While suggesting coordinated rate moves and so forth, Rajan makes breezy allusion to central-bank financing of national outlays. “If all else fails, there is always the “helicopter drop,” whereby the central bank prints money….”

Rajan then links to a Project Syndicate piece by Kemal Dervis, former Minister of Economic Affairs of Turkey and a vice president of the Brookings Institution, who is a fan of helicopter drops, or more accurately “money-financed fiscal programs,” that is financing government deficits through central bank money printing.  here

Chopper Drops

Until recently, helicopter drops have been heresy in monetary circles, despite the success of money-financed fiscal programs in averting the brunt of the Great Depression in Japan, under their brilliant central banker, Takahashi Korekiyo. But of late the likes of British monetary authority Lord Adair Turner and noted Colombia University scholar Michael Woodford have tipped their hats to helicopter drops.

Bring On Beckworth

Fun would be to listen in on a podcast between senior research fellow with the Mercatus Center Program on Monetary Policy economist David Beckworth and Rajan.

The ever-insightful Beckworth has pointed out that the U.S. Federal Reserve essentially exports monetary policy to almost half of the globe’s economy. Here’s Beckworth on the post-Brexit U.S. dollar strength: “Why does a strengthening dollar matter? There are two reasons. First, over 40 percent of the world economy ties its currency to the dollar in some form….That means when the dollar strengthens, these currencies strengthen too. This is the curse of the so called ‘dollar block’ countries–they import their monetary policy from abroad. Via this channel, Brexit has just further tightened monetary conditions in all these countries.”here

But why blame Brexit? The Fed has been tight for years, as seen by the shriveled inflation, NGDP growth and interest rates of the United States.

Perhaps Beckworth should ask if Rajan thinks the U.S. Fed should loosen up and let some air into the global economy, given the “international obligations” of Chair Janet Yellen.

And helicopter drops? Hey, send in the B-52s. Why dilly-dally around?

A “Taylor Rule” For Chopper Drops?

A Benjamin Cole post

The British monetary thinker Lord Adair Turner contends that helicopter drops, at least those designed as money-financed fiscal programs (MFFPs), will work to counter recessions and slow growth, and macroeconomists know they will work.

Turner says the usual objection to chopper drops is political—a fear the money-printers will gain the upper hand, rout common sense, and charge to hyperinflation. Turner may be too kind; some people oppose chopper-drops due to sheer dogma.

So, why not a “Taylor Rule” to guide or restrict MFFPs?

The Taylor Rule

Here is one version of the Taylor Rule:

i = r* + pi + 0.5 (pi-pi*) = 0.5 (y-y*)

Where i is the nominal federal funds rate, r asterisk is the real federal funds rate, pi is the rate of inflation, p asterisk is the target inflation rate, y is a logarithm of real output, and y asterisk is a logarithm of potential output.

True, the Taylor Rule makes less sense when deflation becomes the norm, and there seems to be no provision for quantitative easing (QE), although Taylor has gushed about the use of QE in Japan.

And as even with Market Monetarism NGDPLT, there can be agendas hidden in the little numbers of the Taylor Rule.  For example, a tight-money fanatic could praise NGDPLT—as long as the target was a 2% increase for every year.

Marcus Nunes would add that monetary rules should target results, not process. Still, when it comes to helicopter drops, some rules might provide comfort.

Chopper Drop By Code?

So let’s listen to Marcus and target 6% NGDPLT.

How should a chopper drop code or formula read?

How about this: For every 1% below a target of 6% increase in annual NGDPLT, then $100 billion of money-financed fiscal policy is induced, preferably through cuts in payroll taxes.

In this plan, payroll taxes would be cut by $100 billion for every 1% deficit from target, and the Federal Reserve would print up $100 billion and turn it over to the Social Security-Medicare Trust Funds.

No doubt some readers will have a great deal of uneasiness with this proposal.

But does the current Rube Goldberg arrangements of the Federal Reserve, working through the 22 primary dealers, prosecuting the buying and selling of Treasuries on the open market, and the passing through of interest but not principle from the Fed to the U.S. Treasury, really make sense? Would anyone design such a system from scratch?

Furthermore, the present-day claptrap system relies on major extent on private-sector but extraordinarily regulated commercial bank lending to expand economic output. But banks are loath to make unprofitable loans, and the bulk of bank loans are on property. In other words, the Fed is trying to stimulate the economy through property markets, or (more usually) apply the monetary noose. The noose we saw in 2008, btw.

Conclusion

As noted by many, the targeting of interest rates and inflation is off-center. The target should be expansion of GDP, also called nominal GDP, and preferably the NGDPLT.

Surely, any rules that apply to helicopter drops could be tweaked, although the more simple, the better.

And in the end, it does not matter if inflation is 1.4% or 2.1%, though the current FOMC, and cult of central banking, seems to regard such trivia of Titantic importance.

What matters is sustained growth of NGDPLT, and a nation that consistently pursues pro-business policies.

PS I wonder if federal agencies, including the Federal Reserve, are collecting data as they could. With the advent of bar codes, many national retailers know daily sales. National hotel chains and airlines at any moment know their room and seat counts. Many traffic-monitoring systems exist. Is it not possible to generate a fairly accurate, timely picture of NGDP, and adjust helicopter drops accordingly?

Brilliant Blogging By Adair Turner

A Benjamin Cole post

Well, the web is an amazing place, and not even looking I came across this post by Adair Turner, former chairman of the United Kingdom’s Financial Services Authority and former member of the UK’s Financial Policy Committee.

I guess Turner has credentials galore, though I really don’t know British institutions, and never heard of the guy before. My loss.

Turner comes out in favor of “helicopter drops on a leash,” or what former U.S. Fed Chair Ben Bernanke timidly dubbed “money-financed fiscal expansion.”

In the vernacular of the street, that means the central bank prints money to fund the federal government.

The printed (digitized) money makes up for a shortfall of tax revenues, either as spending has increased or taxes have been cut (my favorite).

Turner addresses the real concern of helicopter drops, which is not macroeconomic (they will almost certainly work), but political. Once the whirlybirds are airborne, office holders could learn to print money and promise constituents ever more tax cuts and also more government services, contracts and benefits. The long-dead Boogeyman Inflation might actually climb out of his grave.

But Turner advocates sensible central-bank enforced rules to limit the chopper-drops. He does not exactly what, but say limit chopper drops to 2% of GDP and only when inflation is below 3%, or something to that effect.

I add, “We trust the D.C,’ers with nerve gas and nukes, large fantastically expensive foreign military occupations, and that medicine will be safe. Not with monetary policy?”

Really, have not macroeconomists turned central banking into something of a fetish?

A Historical Precedent?

Fascinatingly, there is a historical precedent for helicopter drops—something I have never read about in decades of being a macroeconomic policy groupie.

I guess this is one American macroeconomists do not deem worthy of mention: Japanese Finance Minister Korekiyo Takahashi, who used monetary-financed fiscal expansion to pull Japan’s economy out of recession in the early 1930s, reports Turner.

Takahashi sought to tighten policy once output and price growth had returned. Umm, except my new hero Takahashi was then “assassinated by militarists keen to use unconstrained monetary finance to support imperial expansion.”

Turner’s Observations And Conclusion

Turner says of modern-day Japan, “Having eschewed monetary finance for too long, it now has so much public debt (about 250% of GDP) that if that debt were all monetized, excessive inflation would probably result. But there is no credible scenario in which that debt can ever be “repaid” in the normal sense of the word. De facto monetization is the inevitable result, with the Bank of Japan purchasing each month more bonds than the government issues, even while it denies that monetary finance is an acceptable policy option.”

Turner continues, “If Japan had followed Bernanke’s advice in 2003 and implemented a moderate money-financed stimulus, it would today have a slightly higher price level and a lower debt-to-GDP ratio. Having failed to do that, it should now define clear rules and responsibilities to govern and manage as best as possible the inevitable monetization of some part of its accumulated debts.”

Perhaps Turner’s sentiments can be applied to the United States.

PS BTW, Japanese Finance Minister Korekiyo Takahashi must have been some sort of real smartie. According to Wikipedia, Takahashi “introduced controversial financial policies which included abandoning the gold standard, lowering interest rates, and using the Bank of Japan to finance deficit spending by the central government. His decision to cut government spending (especially military outlays) in 1935 led to unrest within the Japanese military,” who assassinated him in 1936.

Maybe that is a lesson central bankers have taken too closely to heart!

Central Bank Quantitative Easing Is Always A Helicopter Drop (It Just Depends on Who Gets The Money)

A Benjamin Cole post

Of late in monetary blog-land has been bruiting about central bank helicopter drops, usually defined as a last resort to boost aggregate demand and fight deflation.

Traditionally, a helicopter drop has been the printing of paper money to aeronautically enrich a euphoric hoi-polloi. But now many monetarists consider digitized quantitative easing (QE) to finance or offset national fiscal deficits or  tax cuts to be a chopper-toss as well. In other words, print money and finance government.

But thinking it over, QE is always a helicopter drop. It just depends who gets the new money.

QE

Okay, in the years 2008 to 2014, the U.S. Treasury ran red ink and sold Treasury bonds, and the Fed digitized money and bought $3 trillion+ in Treasuries, through its QE programs. One does not have to be a cynic to conclude that the Fed printed money and gave it to the federal government, and Columbia economist Michael Woodford, sotto voce, pretty much says so.

So, the institutions and people who sold Treasury bonds into the Fed’s QE program (through the middlemen primary dealers) received in exchange for their Treasuries digitized cash. They received a “helicopter drop” of money, but in exchange for their bonds (bonds that were somewhat appreciated by QE, btw). In this regard there is no moral hazard.

Even today, no one really knows what people who sold Treasuries into the Fed QE program did with the $3 trillion+ in cash they got. We know the $3 trillion went into bank accounts, securities, property, cash or consumption, but by what fractions is unknown. There were property and equity recoveries during the Fed QE years. Some aver that conventional QE was a helicopter drop, but onto asset markets.

But by another conceptual lens or viewpoint, even in the Fed’s conventional QE the taxpayers received a helicopter drop too. Federal taxes were relatively lower than otherwise during QE, as federal government operations were financed by Fed money printing and buying of Treasuries. Net, the federal government stopped borrowing money, or taxing enough to finance operations, and used Fed-created money.

Conclusion

QE is always a helicopter drop.

Helicopters Drops: The Last Resort—But Why Not Chopper First?

A Benjamin Cole post

There has been some blog chatter of late on helicopter drops, that is the central bank printing money to toss on the population, or to finance government operations, or to compensate government for tax cuts.

Kentucky economist David Beckworth is open to helicopter drops as income tax cuts married to QE. The highly-regarded economist Michael Woodford of Columbia allows for something similar, in his oblique fashion.

Of late, former Fed chief Ben Bernanke suggested that when times are really tough, he would hold his nose and pilot helicopter drops, which he dubs “money financed fiscal programs” or MFFPs.  Bernanke’s blogpost appears to have cattle-prodded George Masonite scholar and top-blogger Scott Sumner onto the “last resort” whirlybirds, with many a hem, haw and harrumph.

So heavy hitters all say helicopter drops will work. In fact, Bernanke and Sumner go with the “nuke” analogy—printing money to run government will almost certainly work to boost the economy, but must only to be used to avert economic doomsday.

Why Wait?

But is the “Helicopter Drops=A-bombs” analogy really accurate?

Who says the analogy is not, “Keep your best power-hitter on the bench, until you really need him to win the game?”

In other words, monetary macroeconomists may be poor managers. They prefer to hit singles with rate cuts, or IOER or not, or negative interest rates, or limited QE.

But what would have been the impact in 2008, if the Fed and federal government had gone straight to serious helicopter drops?

In truth, it is difficult to decipher certain finer points of what is a helicopter drop and what is not. The federal government after 2008 ran big deficits and the Federal Reserve simultaneously bought a few trillion dollars of U.S. Treasuries.

It sure looks to me like post-2008, the federal government in fact had a Bernanke-style MFFP going. Bernanke evidently contends that because post-2008 the Treasury issued bonds and the Fed printed money and bought the bonds (which they have kept on their balance sheet ever since), that post-2008 was not an MFFP.

Bernanke says MFFP happens only if the Fed prints money and hands it directly to the Treasury. The fig-leaf of the Treasury issuing bonds means post-2008 federal policy was only QE, not a chopper-drop.

But the key point is no one in the private sector had to give up cash (through bond purchases) to finance the federal deficit post-2008. The Fed printed the money that financed the government deficit.

Let’s call it a “whirlybird offload.”

Conclusion And Prophylactic Expansionism

There is traditional, institutional and professional reticence about helicopter drops in the macroeconomics profession, as revealed in Bernanke’s tortured nomenclature and use of acronyms to describe a central bank printing money and handing to the federal government. MFFP!

There may be sound political reasons for skepticism regarding helicopter drops—as in, the U.S. Congress might learn to love the choppers a little too much, and we would finally see the Inflation Bogeyman.

But in the next recession why not fly the money-choppers ASAP—in fact, send in the B-52s. Why diddle around?

And could there be a justification for modest-scale chopper-drops now? What would be the harm of the Fed printing up $200 billion and sending it across the street to the Treasury, and President Obama cutting federal taxes by a like amount?

Why does the Fed (or other central banks) always have to wait for a recession before acting? How about monetary prophylactic expansionism?

Please be serious: Put the toys away and just change the policy target

A James Alexander post

Eric Lonergan takes Bank of England blogger Fergus Cumming to task for not being up to speed with the very latest in the helicopter drop debate. This arcane dispute is beyond me. It is not going to happen. Central banks will never act “irresponsibly”, as the helicopter drop requires – it is not in their DNA and nor should it be. They want “serious” policies with “serious” goals – not mere illustrative thought experiments, no matter how smart.

However, Lonergan misses the core problem, one that Cumming alludes to:

“For helicopter money to work, households and firms have to believe that all future central bankers and governments want to abandon inflation targeting.  That seems implausible given current institutional set-ups.”

A central bank cannot do helicopter drops if they are tied to fixed Inflation Targeting. Central banks cannot get the public to believe the helicopter drop is serious, and the money to be spent, because of IT. The central bank would have to temporarily abandon fixed IT, and that’s hard to do credibly.

And there’s the rub.

The central bank should change it’s target. It could move to flexible inflation targeting, a distinct and much more successful policy proven in many countries. Or, even better, price level targeting. Best of all, nominal GDP level targeting.

The central banks and their political masters who set the banks’ goals should abandon strict IT and its suffocation of the real economy with low nominal growth. It really is that simple. IT works to control inflation, great, but controlling inflation is the wrong target. Targeting nominal growth is the right target and central banks should simply adopt it instead.  (Not least if adoption could also put an end to these interminable debates about monetary vs fiscal policy or helicopter drops.)