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?

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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?

The Independent Fed And NGDPLT

A Benjamin Cole post

“I agree that a credible NGDP level target would go a long ways in addressing this problem (of weak economic growth). I am, however, becoming less convinced the Fed could politically do something like NGDP level targeting….”

David Beckworth, Kentucky scholar and new podcaster, makes the fascinating statement above in the comments section of his excellent blog, Macro And Other Market Musings.

At first, Beckworth’s observation is something of a shoulder-shrug. Yes, the U.S. Federal Reserve Board operates within political limits.

Independent? What For?

But on second look, Beckworth’s comment is thought-provoking. Wait a minute—isn’t the Fed an independent agency?

Central bank independence, one of the most–gloried and cartouched escutcheons in the modern macroeconomics parade, is why the Fed does what is right, not bowing to short-term political demands, or so the story goes. No printing money around election time, for example.

But in watching the current presidential campaign antics, the question arises of what minute fraction of the voting population has the slightest idea of what is NGPDLT, or that the Fed has a 2% inflation target (on PCE no less), or that Janet Yellen is the Fed Chair?

Frankly, it does not seem likely that if the Fed switched the NGDPLT that the vast public would know, and if they did know, would care.

Even the perennial tight-money crackpots have been fading into the background, having cried wolf a few thousand times too many, most notably and loudly after 2008.

So who would take umbrage of Fed switch to a NGDPLT policy? A few academics and eccentric radio talk-show loonies?

So Why No NGDPLT?

More probably the Fed, or Fed staffers truly believe that keeping inflation as measured by the PCE under 2% is the only way to conduct monetary policy. Abundant Fed literature shows no embrace of NGDPLT. The vast sea of Fed Phd’s (in sinecures) appear comfortable with recent macroeconomic results, as does the FOMC, while lurking inflation is ever the potent bogeyman in Fed reports and regional bank websites.

The most recent Fed-bash in Jackson Hole featured four panels, all on inflation, and no other panels. This monomania on inflation exists in a prolonged era of microscopic inflation rates, but weak economic growth.

Marcus Nunes has documented that central banks often appear dissolute and chronically ineffective when faced with serious economic contractions. The short story may be the U.S. got out of the Great Depression, but only thanks to WWII, which forced Fed accommodation. That accommodation extended through the worst of the Cold War, and into the late 1960s.

But in the decades since, that concept of central bank independence has become enshrined high in the pantheon of macroeconomic totems, and other nations and regions, such as Europe and Japan have adopted similar institutions. There is a book out, “The Rise of the People’s Bank of China,” that suggests the PBOC is able to muster a degree of independence in recent years, as the Chinese Communist Party, like pols everywhere, is uncertain as to the intricacies of financial systems and central banking and so defers to the PBOC.

It is worth noting that in recent years Chinese inflation and growth rates have slowed.

Conclusion

More likely, it is not political constraints but rather central bank independence and ossification that is a barrier to the Fed adopting NGDPLT, or even to merely tilt to the growth side of policy-making, through more QE, or lower interest on excess reserves.

The Fed is independent and that is the problem.

 

Win-A-Rama For America

A Benjamin Cole post

The always-intelligent Market Monetarist and Kentucky economist David Beckworth recently posts on the “shortage of safe assets.”

So what is a safe asset shortage?

“It is the shortage of those (safe) assets that are highly liquid, expected to be stable in value, and used to facilitate exchange for institutional investors in the shadow-banking system. They effectively function as money for institutional investors and include treasuries, agencies, commercial paper, and repos. During the crisis many of the privately issued safe assets disappeared, erasing a large chunk of the shadow-banking money supply,” writes Beckworth, from under his state-icon coonskin cap.

So what? Well, this is what:

“[If] this excess demand for safe assets is big enough it will push down the natural interest rate below zero. Since the central bank cannot push its policy rate very far past 0%, an interest rate gap will emerge and cause output to fall below its potential. That seems to fit post-2008 fairly well.”

Print Money

Okay, put on your seat-belts. A primer: In macroeconomics, everyone defers to Michael Woodford, the Colombia scholar, who even gets invited to speak at the annual central-banker orgy in Jackson Hole, Wyoming.

And Woodford says now is a good time to print money and pay federal bills and debts with fresh cash. See:

The Win-A-Rama Solution

In the U.S., employees and employers pay onerous 15%+ FICA (payroll) taxes, on the first $100,000 or so of wages, into the Social Security and Medicare trust funds.

So, declare a FICA tax holiday.

Compensate for the loss of tax revenue by having the Fed buy $1 trillion a year of T-bonds, and placing the loot into the Social Security and Medicare trust funds.

This is a win for overtaxed productive people and a win for the economy. It will result in more demand and more hiring. I am not sure it would be inflationary, as the cost of employment would drop.

Conclusion

Shrewd observers will note Win-A-Rama does not solve Beckworth’s safe asset problem. It sucks $1 trillion a year in safe assets into the trust funds.

Win-A-Rama would make matters worse not better!

But Beckworth avers one solution to the safe asset shortage is to “shock and awe” the economy with pro-growth government policies, in which case many private assets become perceived as safe. Win-A-Rama could do the trick.

And if not, then millions of productive Americans will have gotten a tax break, without buying Panama hats from greasy-palmed bankers and lawyers.

Not so bad.

China, Hong Kong and Singapore Sliding—Japan Not So Much. Beckworth and the Fed Export Of Recession

A Benjamin Cole post

China in recent years has kept its slowly rising yuan more or less pegged to the U.S. dollar, while Hong Kong has been explicitly pegged to greenbacks, and Singapore pegged its dollar to a mix of trading currencies, including prominently the greenback.

There is problem with this pegging—the U. S. Federal Reserve has been running a tight money policy since tapering down its successful open-ended quantitative easing (QE) program last year.

Now we see China desperately trying to un-peg its yuan, but awkwardly (fearful of dollar-denominated debts), and the Hong Kong stock market as of August 21 is off 7.47% YOY. Singapore in Q2 reported deflation and recession.

David Beckworth, cartoonist and University of Western Kentucky scholar, has called the above process the export of U.S. monetary policy.

PBOC, HKMA and MAS

Of course, the relevant central banks—the People’s Bank of China, the Hong Kong Monetary Authority and the Monetary Authority of Singapore—should immediately move to expansionary pro-growth stances until their economies are open full-throttle.

With pegged exchange rates, the policymakers at the three central banks have essentially defaulted on their obligations, and let the Fed dictate monetary policy, leading to a regional weakling economy blue in the face for lack of money. BTW, recent history suggests the Far East does not do recession well.

Indeed, if sanity prevailed, Far East central bankers would hold a confab to make Donald Trump blush, and gaily declare they will gun the money presses until the plates melt.

After all, moderate inflation will be small price to pay to avoid recession, or for robust economic growth, of which the region is fully capable.

Japan

Japan, of course, is trying to recover from 20 years of deflationary tight money, starting 1992. The Bank of Japan is now pursuing a steady QE program, perhaps too timidly.

Nevertheless, despite last week’s reverses, the Japan Nikkei 225 is up 12.34% year-to-date and up 26.78% year-over-year. Tourism to Japan leapt nearly 50% YOY in H1, thanks to a yen that depreciated from 80 to 124 or so to the U.S. dollar. Japanese corporate profits have been very healthy. There is so much paper cash sloshing around the Japanese economy ($6000 per resident, dollar equivalent) that official GDP figures, or even employment stats, may be suspect. But certainly the relative success of Japan suggests that persistent QE is a valuable tool in promoting economic revival and growth, and other Far East central banks should quickly adopt the same.

Conclusion

As usual, I support NGDPLT, with the proviso that central banks shoot higher rather than lower, as in 7% or so. To my fellow Market Monetarists, I ask, “Why be so prissy about inflation?”

In 1992 Milton Friedman told the Fed to gun the presses when inflation was at 3%. Fed Chairman Paul Volcker ended his war on inflation in 1981 when the CPI dipped below 5%. Why the present-day fey squeamishness about inflation?

Modern economies appear to suffocate at inflation below 3%.  I suspect it has to do with robust growth creating bottlenecks that are addressed by higher prices; sticky wages; criminalized housing production; and other friction and structural impediments.

The good news is that inflation is not that important. Economies have flourished for decades with moderate inflation—see the United States 1982 to 2007.

I prefer prosperity and some inflation to stagnation in real growth and prices. I will never be a central banker.

The Beatles sing about Greece & the Troika: “You say yes, I say no. You say stop but I say go, go, go. Oh no. You say goodbye and I say hello. Hello, hello. I don’t know why you say goodbye. I say hello …”

Just one example from each side of the aisle:

Yes:

A No vote would bring a new economic darkness. There is widespread agreement that the initial period would be characterised by default on Greece’s obligations to creditors, a chronic liquidity contraction and a solvency crisis in the banking sector, which would keep the banks shut. It would see a sclerotic blockage of most forms of economic activity. A further sharp GDP contraction would ensue. Whether or not the government chose to introduce a parallel currency to pay wages, pensions and other bills in the interim, a “new drachma” would be introduced. The currency would almost certainly drop sharply, most likely by about 50 per cent at first. Behind the wall of capital controls, the Bank of Greece would then print money. The risk of Greek deflation would disappear at a stroke. Banks would re-open, supported by the central bank and by a government programme to recapitalise them.

So Syriza would finally have re-taken control of Greece’s economic destiny. But it is unlikely to be successful in delivering a bright economic future, without help, for at least three reasons.

No:

This Sunday, the Greek people will finally face a decisive choice, yay or nay, to stay in the eurozone. In the humble opinion of this writer, the Greeks should reject Europe’s terms, ditch the euro, and take their chances restarting their own currency.

I’m certainly not the first or the smartest person to recommend this course. But there’s an extra wrinkle to add: Along with its own self-preservation, Greece should do it for the sake of its fellow European nations, since a Grexit might just shock Europe out of its crazed economic murder-suicide pact.

Images of Greece & Others

Contrast this chart

Beatles-Greece_1

With this

Beatles-Greece_2

Here Greece doesn´t standout at all, it´s super boom Ireland!

But Greece notches the biggest drop from the peak

Beatles-Greece_3

Dives just as deep but stays there for longer than the US during the Great Depression

Beatles-Greece_4

Comparing the “heathens” along “sacred” dimensions

Beatles-Greece_5

Beatles-Greece_6

Beatles-Greece_7

Except for the pre-crisis debt level, no great (and unsurmountable) differences

Which leads me to endorse David Beckworth´s argument in The Monetary Origins of the Eurozone Crisis;

The Eurozone crisis is one of the greatest economic tragedies of the past century. It has caused immense human suffering and continues to this day. The standard view attributes it to a pre-crisis buildup of public and private debt augmented by the imposition of austerity during the crisis. While there is evidence of a relationship between these developments and economic growth during the crisis, this evidence upon closer examination points to the common monetary policy shared by these countries as the real culprit for the sharp decline in economic activity. In particular, the ECB’s tightening of monetary policy in 2008 and 2010-2011 seem to have not only caused two recessions but sparked the sovereign debt crisis and gave teeth to the austerity programs. This finding points to the need for a new monetary policy regime in the Eurozone. The case is made that the new regime should be a growth path target for total money spending.

The illustrative pictures

Beatles-Greece_8

Bottom Line: Greece, more than the rest had (has) enormous structural issues, but the Gordian knot of monetary policy only helped strangle it!

The 2002-04 period in the limelight once again

Tony Yates:

It’s highly contestable that the Fed set too-loose monetary policy in the early 2000s.  Bernanke made a stern and convincing case in favour of what they did while still Fed chair.  He pointed out that if you substituted inflation for forecast inflation in the Taylor Rule, for which a convincing case can be made that one should, you find that Fed policy was not too loose.  Specifically, rates were so low because the Fed were worried about deflation, and the zero bound.  They had watched what they saw as slow and weak Bank of Japan monetary policy, and had seen its consequences, and were doing what they could to avoid that experience being repeated.

David Beckworth in the comment section of Yates´post:

I would note that one of the largest surges in U.S. productivity growth occurred between 2002-2004. This was a well publicized development and raised trend productivity growth as seen in consensus forecasts at the time. All else equal, this development would imply a higher natural interest rate and lower inflation. Ironically, following a Taylor Rule-like reaction function can cause monetary policy to be too easy given these developments. It is more pronounced when the Taylor Rule uses forecasted inflation.

George Selgin, Berrak Bahadir and I build upon these papers and others by showing how the 2002-2004 productivity surge lured the Fed into complacency during the housing boom. We do not say it was the only cause for the boom or that the easing was intentional, but only that it failed to properly handle the productivity surge. And that is how it contributed to the boom.

In addition, David Beckworth has a post on the topic:

George Selgin, Berrak Bahadir, and I recently published an article that lends support to John Taylor’s view of Fed policy during this time. It received some pushback from Scott Sumner who is sympathetic to both the saving glut and secular stagnation views. At the same time, Tony Yates provided a critique of John Taylor’s argument on the financial crisis that was heartily endorsed by Paul Krugman. So the debate over the Fed policy during this period continues.

A little over 4 years ago, I did a lengthy post on this topic under the title “BERNANKE´S GSG HYPOTHESIS: A COP-OUT”. In that post I gave a coherent explanation of why house prices took off in late 1997 (long before the period of interest rate being “too low for too long”).

In their paper, BBS put a lot of emphasis on the productivity surge, a fact that tends to lower inflation and increase real GDP growth, so that if the Fed reacts to the fall in inflation below target by “loosening” monetary policy, it will cause instability.

I want to tell an alternative story, the conclusion of which is that monetary policy in 2002-04, particularly after mid-2003 was, to use an expression favored by Greenspan, the “appropriate monetary policy”.

The model behind the story is the dynamic aggregate demand-aggregate supply model, and the stance of monetary policy is defined by NGDP relative to trend. If NGDP is above trend monetary policy is “easy”, if it´s below trend, monetary policy is “tight”.

As the pictures illustrate, the “problem” began in late 1997. At that point, productivity started to increase above trend (a positive productivity shock). At the same time, oil prices fell, impacted by the fall in demand following the Asia crisis. From the vantage point of the US, this is also a positive supply shock. As a result, inflation fell way below “target”. Meanwhile, monetary policy became “easy”, with NGDP rising above trend (as did RGDP).

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In 2001, monetary policy tightened, with NGDP falling back to trend. However, the tightening was excessive, with NGDP falling below trend (as does RGDP, which contradicts Beckworth´s argument that the economy was “overheating during the housing boom”).

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From late 2001, a positive productivity shock was accompanied by a negative oil shock. After late 2003, it appears that the negative supply shock from rising oil prices was stronger than the positive supply shock from productivity. This is consistent with inflation picking up.

At that point it appears that the easing of monetary policy – forward guidance – guiding NGDP back to trend coupled with a slight leftward shift in the aggregate supply curve resulted in inflation moving back closer to target.

As the house price chart shows, throughout 1997 – 2005, house prices were on the rise. That story is quite separate from the monetary policy story. From late 1997 to late 2004, the Fed lost and regained nominal stability. It was left to Bernanke´s Fed to lose it “majestically”!

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