When it comes to raising inflation, the “hot potato effect” dominates.1 It is all a matter of triggering it. One of this issues with quantitative easing is that there is inefficient transmission, because banks tend to balloon in reserves yet do not lend because of positive IOER. By making IOER negative, we can trigger the lending, and so forth with forward guidance. However, there is a better way (for welfare) in my opinion, namely Helicopter Money.
Supply and Demand Under Current QE
It can be said that everything is supply and demand, so here is a way to think about how current QE works. Banks have a high demand for reserves under positive IOER, so most of the reserves that are created by QE are just held by banks. Now, banks don’t “lend out reserves”.2 However, all that money which could be created simply isn’t via the lack of loaning incentives.
The hope is that the safety of the intermediaries is preserved and they begin to loan anyway. However, that hasn’t played out in practice. Most of the M2 created hasn’t “hit the market”, so to speak. M2 aggregates are misleading.
HPE Under Helicopter Money
Helicopter money skips that step. Instead, we can just transfer printed money to individuals. What that essentially does is fulfill a certain real cash balance, so that the excess money is “tossed”, raising the price level.3 There are many advantages to this.
One, the welfare of the individuals (who can spend more) is raised. Two, there are no chances of lockup in the financial system. To me, this is a more powerful overall way to boost AD.
Sumner, Scott. 2013. “The “hot potato effect” explained.” TheMoneyIllusion. https://www.themoneyillusion.com/the-hot-potato-effect-explained/.
McLeay, Michael, Amar Radia, and Ryland Thomas. 2014. “Money creation in the modern economy.” Quarterly Bulletin, Bank of England, Q1. https://www.monetary.org/wp-content/uploads/2016/03/money-creation-in-the-modern-economy.pdf.
Friedman, Milton. 1956. “The Optimum Quantity of Money.” In The Optimum Quantity of Money and Other Essays, published 1969. MacMillan and Company Limited.
It’s stock vs. flow. QE-forever does exactly the opposite of what the advocates of N-gDp level targeting says is important (“It is the real interest rate that affects spending”).
Adding infinite and misdirected money products (LSAPs on sovereigns) while remunerating IBDDs (inducing nonbank disintermediation), generates negative real rates of interest; has a negative economic multiplier; creates asset bubbles (results in an excess of savings over real investment outlets); exacerbates income inequality, and depreciates the exchange value of the U.S. $.
Whereas the regulatory release of savings invokes a spontaneous chain reaction, an expanding sequence of reactions, a self-propelling and amplifying chain of events.
The activation and discharge of $15 trillion of finite savings products (near money substitutes), via targeted real investment outlets has a positive economic multiplier, a ripple effect (increases productivity and real wages), while increasing both the real rate and nominal rates of interest.
No, contrary to Bankrupt-u-Bernanke’s claim that: “Money is fungible”…“One dollar is like any other”, pg. 357 in “The Courage to Act”, the utilization of savings is a catalyst, it is not a matching of economic accounts, not a 1-2-1 economic transaction (correlation between two sets). This is demonstrated by debits to particular deposit accounts.
“In economics, a multiplier broadly refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables. In terms of gross domestic product, the multiplier effect causes gains in total output to be greater than the change in spending that caused it.”
It’s a disputation of the Gurley-Shaw thesis (that there is no difference between money and liquid assets).
N-gDp LPT is nothing other than stagflation reincarnated. It caps real output and maximizes inflation.
See: “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
“Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386
The fact is that an increase in bank CDs adds nothing to GDP. In fact, it shrinks AD.
Friedman was only good at math.