Wednesday, October 28, 2015

"Helicopter Money" As I See It

I have just finished reading Adair Turner's great new book"Between Debt and the Devil: Money, Credit, and Fixing Global Finance". I intend to write a review on it later, but right now I want to give some food for thought for those who are interested in what is arguably the most controversial part of Mr Turner's overall message (a message I mostly agree with), namely, "Overt Monetary Finance" (OMF), or "Helicopter Money".

I'm still working on getting a firm grip of this concept, which in no way is as clear as it might sound to someone who hasn't really tried to study it (this, of course, applies to everything in science, or life in general). "Money printing" was in no way a clear concept even in Weimar Germany, and the real-time experience seems to have been in stark contrast to the simplified image of "pure monetary madness" created by writers afterwards.* To get an idea of the problems around the OMF concept, I suggest you read William White's take on it at Project Syndicate (don't miss Adair Turner's reply to Mr White which he has posted as a comment on that article).

Being aware of the danger of over-simplification, I nevertheless present, in simple terms, my take on OMF below. My aim is to provide a glimpse of the substance ("the wood") as I see it, without letting the form ("the trees") get into the way. There are many technical ways to achieve more or less the same outcome. My biased opinion is that behind the apparent simplicity of my description lies a fairly nuanced understanding of the subject, thanks to Messieurs Turner and White, and various other writers dead and living.


"Just Like Money But Not Money"

a play by P. Golovatscheff

Act 1: Mrs Government meets Mr Supplier-Taxpayer

When Mrs Government decides to spend -- often to acquire goods or services to be used for the 'common good' of the nation -- she hands over IOUs (usually, but not necessarily, what we call "money") to the one who sells goods or services to her. This someone is often a government employee or, more generally, a government supplier. We can imagine how Mrs Government says to the supplier who has just provided her with goods or services:

"Mr Supplier, please take these IOUs and trust that they will be redeemed by taxpayers, sooner or later."

In other words, Mr Supplier should expect to be able to buy goods or services from other taxpayers using these IOUs, because a tax obligation makes it necessary for taxpayers to acquire -- really, redeem -- these IOUs. If others share his expectation, then the IOUs become generally accepted. As we see, the IOUs are not Mrs Government's own IOUs; she issues them on behalf of the taxpayers. This is comparable to a husband shopping with a credit card connected to his wife's account, when the wife is the sole income-earner in the family. It is she who will redeem (for instance, by selling labor) the IOUs her husband issues -- with the common good of the family in his mind, no doubt -- on her behalf.

This is the underlying logic I see behind government spending and taxation. This is, also, my reading of Alfred Mitchell-Innes and the kind of chartalism he seemed to endorse (here, and one year later here). In his words: "Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money". I might be wrong, but I feel that Innes has not been fully understood even by people who often cite him (I'm thinking about some MMT writers, among others).

Act 2: Impeccably honest Mrs Government fails to fool Mr Supplier-Taxpayer

What the advocates of "helicopter money" are effectively suggesting is that Mrs Government should spend like she is used to spend, and actually spend a bit more, but this time she should sent a letter to Mr Supplier, saying:

Dear Mr Supplier / My Beloved Taxpayer:

Take these IOUs but understand that they are not really IOUs at all. My firm intention is not to bother taxpayers, You included, by placing any burden whatsoever related to this spending on Your shoulders. Not even by issuing bonds later to cover the deficit I am incurring through this spending, because the bonds would burden You with unnecessary interest charges. 
Having said this, I can assure You that personally You have nothing to worry about. These IOUs are fungible. By this I don't mean that they will be consumed by some eukaryotic organism, but that no one can tell them from the IOUs that are matched with a real tax burden. (On a more personal note: I cannot express in words how sorry I am for this real burden I impose on You, but that is unfortunately the only way my spending can be financed in any meaningful sense of the word -- rest assured that I will never forget Your sacrifice.) The fungibility of these IOUs will ensure that you are able to give them up in exchange for goods or services as before, just like they were real IOUs.
But please consider this friendly advice: If You take history as your guide, You might want to get rid of these IOUs rather quickly. This is because my honesty -- I scarcely need to remind You that I am a lady of high ethical standards, and, additionally, transparency seems to be in fashion -- around this matter should, if not in practice then at least in theory, cause any rational human being to expect higher inflation sooner or later. And any economist can tell you that if a sufficient amount of people expect higher inflation later, the inflation will actually arrive much sooner than expected.
Always at Your service, Truly Yours,
 Mrs Government

---------------------------- THE PLAY ENDS -------------------------------

I want to end this post my making two broad statements.

First, we cannot say that OMF can be used to "finance" certain productive investments by the government. Any attempt at "ear-marking" would be just an exercise in illusion. OMF will be an inseparable part of the overall government budget, and will thus "finance" in equal proportion all the consumption and investment that may arise from government spending -- also the wasteful activities. We are all imperfect, and the government doesn't make an exception here. Further, we should expect that any easily identifiable productive investments are already made by the government. In any case, our ability to undertake them should have nothing directly to do with OMF.

Secondly, and more importantly, it makes very little sense to say that OMF can finance anything at all. The whole point with OMF is that part of government spending will never be financed in any meaningful sense of the word. That a person of a very high intellectual capability can claim that OMF (yes, the F stands for 'Finance') can be used to finance government spending shows mainly how horrible is the state of our economic vocabulary. "Overt Monetary Fooling/Faking/Failure" would, to me, sound more descriptive. Unfortunately, sloppy language often corresponds with sloppy thinking, and even Mr Turner doesn't seem to be able to fully escape this trap.

Despite my harsh criticism above (which no doubt might lead to me being exposed as a fool later), I honestly believe that in Adair Turner we have one of the brightest minds when it comes to understanding debt. He has been clear about how OMF is potentially a very dangerous tool, and he has on many occasions stressed that his (immediate) goal is to create debate around it; to break the silence around this subject often considered a taboo.

I fully agree with Mr Turner. I would say that this kind of debate is not only welcome, but that it can lead to improved understanding of the problems caused by the global debt overhang.

It is my intention to engage in this debate with this piece.

* In order to understand how things appeared to various spectators, and actors, "in real time" during the Weimar experiment, one could do much worse than by reading historian Adam Fergusson's study, "When Money Dies" (1975), on the Weimar hyperinflation.


  1. "It is my intention to engage in this debate with this piece."


    There is a difference between Money and Credit.
    Money as defined by law. Section 31 U.S.C. 5103, defines legal tender as "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.

    Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (Fed liabilities). This would meet the requirements of Section 411 (Federal Reserve Act), but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

    The Fed defines credit as such: "Credit dollars are a debt generated currency that is denominated by a unit of account. Unlike money, credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply."

    As an aside; why does the Fed count 'credit', which is primarily BANK DEBT, as if it were money and include it, even though they admit it isn't, as being part of the 'money supply'? Also noteworthy is the Fed's use of the term "credit dollars", which is a fiction, the credit/debt the Fed and the banks generate is neither dollars, money or even a currency.

    There is no law anywhere that grants to either the Federal Reserve or the banks the authority to create money. There is no law anywhere that designates or acknowledges the credit/debt they do create as being money or even a currency.

    Deposit accounts are a fiction. There is no money in any 'deposit account' of any type anywhere in all of westernized banking, they are all Credited Accounts, they are all Bank Debt. This means that the richest amongst us have exactly the same amount of 'money' in their credited accounts as the poorest amongst us have in theirs, $0.00.

    That a bank maintains some 'money' on hand to placate a few requests for the actual monetary medium, does not negate the fact that all credited accounts maintain a zero monetary balance. A ledger book entry denoting the amount of 'money' the bank owes to (stole from) the depositor, is not 'money', regardless of anyone's ability to simulate 'spending' that ledger book entry with a debit card. Passing around bank debt from one recipient to another, is not payment for anything. Crediting an account with the amount and actual payment are two different things.

    - Continued

  2. - Continued

    It's really not that hard to understand. Let's say you go down to your corner store to pick up a few things. You don't have any money with you so the store owner lets you take the stuff after he totals it and you sign for the amount, promising to pay later. Did you just use a 'currency', or 'digital credit', or 'dollars' to pay for the stuff you got from the store? No, you incurred a debt obligation that requires payment at a future date.

    It works the same way when you use your debit card. All you're doing when you use a debit card to make a purchase is, transferring your obligation to pay the store owner, to the bank, payment has yet to be made. The bank deducts the amount from its debt to you, as represented by your account with them, and adds that amount to the debt it owes to the store owner, as represented by his account with the bank. There was no money or currency of any type, digital, electronic or otherwise, used or exchanged in that transaction, just a transfer of an obligation to pay.

    The notion that we're using 'digital money' or 'digital currency' or 'digital dollars', as a medium of exchange is nothing more than a trick of the mind, a deception, it's how we rationalize the transaction. Also, because we believe that we can go to the bank and withdraw the amount credited to our account, in cash if we wanted to, and the fact that we can successfully, with limits, do this on occasion, reinforces that deception.

    Credit, an obligation to pay vs. Money, payment.

  3. Well said, Dwain!

    Thanks for the Fed's definition of "credit", I hadn't read it before.

    What you say makes very much sense to me. Have a look at a previous blog post of mine:

    There's much you agree with? And then there is one thing you don't agree with. I know it's kind of a leap of faith, but I would really appreciate it if you could consider, just consider, what I say about 'fiat money': that it, too, is just a "promise to pay", as it is a credit balance in the central bank ledger, not wholly unlike a 'deposit' which is a credit balance in a commercial bank ledger. I understand that thinking in this way makes one great demand on all of us: We need to be able to see the possibility that what is owed is not 'money', but just something one can sell and the price of which is expressed in the 'unit of account'. When looking at things from this viewpoint, we need to conclude that it is not the bank which owes us something, but the people and companies on the "asset side" of the bank's balance sheet, ie. the ones holding debit balances in the bank ledger.

    I understand that this is quite a stretch (it was for me, too). But give it a thought?

  4. Fiat money is not a promise to pay anything, it is payment, full and complete. And while it may be accounted in a thieving, lying, bankster ledger, fiat money stands and exists independent of such accounting.

    1. Thanks for sharing your opinion with me, Dwain.

    2. I'm not sharing my opinion with you, I'm correcting you opinions with fact.