Adair Turner has written a somewhat provocative article for Project Syndicate: "Japan’s Accounting Problem". As a scientist I'm indebted to Turner in many ways. For instance, his "Stockholm Speech" provided me with a very clear overview of the "big picture" around our global debt overhang and helped me forward with my theoretical work.
When it comes to this new article, and "overt money financing" (OMF -- Turner's name for "helicopter money") in general, I strongly disagree with him. As "money" itself is just an IOU, government debt cannot be monetized in the way Turner seems to suggest.
Quantitative Easing replaces government bonds (IOUs) in the hands of the public with reserves/deposits (IOUs). The total nominal value of government IOUs in the hands of the public remains more or less intact. Whereas the repayment of bonds held by the public (Case 1) leads to deposit transfers from taxpayers to bondholders, the repayment of bonds held by central bank (Case 2) -- as those bonds fall due -- leads to deposit transfers from taxpayers to the government/central bank.
In Case 1 (see above), the consequence of this government debt repayment is reduced aggregate nominal value of all government bonds held by the public, while the aggregate nominal value, or amount, of deposits held by the public remains intact.
In Case 2, the consequence of repayment is reduced aggregate nominal value, or amount, of deposits in the hands of the public. This reduction is equal to the reduction of aggregate nominal value of all bonds held by the public in Case 1.
Thus, what is important is not the type of IOUs in the hands of public, but the overall budget deficits and their eventual effect on agents' inflation expectations -- which are affected by agents' trust in the government's "promises to pay" (IOUs) -- promises to pay via taxation. Whether these deficits lead to an increasing amount of bonds in the hands of the public, or to an increasing amount of deposits in the hands of the public, is close to irrelevant. This is especially true now that government bond yields are close to zero -- as has been the case in Japan more or less since 1998 when 10-year JGB yield fell below 2 %.
OMF offers, unfortunately, no easy solution to our global (government) debt problems.
I have criticized "helicopter money" advocates for their implicit assumption that inflation can be micromanaged (by "micro-" I mean something like "within 5 percentage points") in a previous post:
For more information on deposits being IOUs, see, for instance, these two posts (I elaborate my "postulates" in the comment sections of the posts):
Hi I have some doubt regarding QE and the effect on inflation..
ReplyDelete- The common people are in debt, but the rich have savings and bonds. If we do QE, and buy up bonds, dosn't it only supply cash to the wealty, not those in debt? Hove can we be sure that the money will be spent and create inflation? Dosn't they just lend them out and only create more debt?
I think you pose relevant questions. QE has no doubt many aims, but your last sentence reveals one of its main aims: More lending.
DeleteQE is not "money printing" that would in itself lead to inflation and make debts easier to repay. It just isn't. But even most of the investors don't understand that well how it works, so it has a lot of psychological effects. It leads to more risk-taking, because when it's incorrectly understood, it seems like a clear signal to take on leverage and buy real assets. It sounds like a "no-brainer" for many: "They are printing money, so I should buy real assets!". The problem is that there are no no-brainers in investing -- not in any longer term.
Hi, thanks for answer.
DeleteIt only leads me to my next concern., or just a conspiracy theory?
Normally State debt is locked by public bonds or state bonds.., if the QE buy back the bonds, will in the end the debt only be an issue between lender (State) and the bank? Is it then possible to moneterize the debt and/or zero out the debt? - The rich will have cash for bonds, the State debt free and the people still in debt?-)