The cat is progressively getting out of the bag – Part 2

This is the second and final part of my discussion of the – Economic Affairs Commitee (House of Lords) – hearings into – Quantitative Easing: Committee to examine whether inflationary fears justified, the future of QE, and the merits of ‘helicopter money’ approaches. In Part 1 we learned that statements made by notable central bank governors (or equivalent) to the public about what they are doing are highly questionable given the evidence given by two prominent witnesses to the House of Lords enquiry. The evidence doesn’t just refer to matters pertaining to the UK. We learned that it is obvious that large-scale government bond buying programs by central banks are funding fiscal deficits despite the denial from the central bank officials. In this Part, we find more revealing statements by the witnesses further suggest that the central bank officials, including those from the Reserve Bank of Australia governor, are, at best misleading. At worst – use your own words.

We left Part 1 with the conclusion that things at the Committee hearings then got interesting.

Adair Turner, the former head of the British Financial Services Authority, was then asked about “helicopter money”.

He said:

Some people using the expression “helicopter money” think that literally it has to mean sending a cheque to every individual, so it is the nearest equivalent of Milton Friedman’s scattering of money from a helicopter and people picking it up and spending it … [alternatively] … should you ever have an element of overt monetary finance? Should you ever run a fiscal deficit? The Government issue debt; the bank buys it and the bank makes it plain that that is permanent and, indeed, that in its purest form it intends in future to finance it with reserves that are not remunerated …

… The benefits of that versus a purely monetary transmission mechanism go back to what I said earlier, which is that when interest rates are already close to zero or lower bound, you are helping to finance a fiscal stimulus that produces a direct stimulus through to the economy where the purely monetary mechanism will not work …

It is because people are worried that there might be constraints on the amount of fiscal deficits that Governments are willing to run, which therefore might leave us in a liquidity trap, that a number of central bankers have argued that under certain circumstances we should have overt money finance …

… you end up, in the case of the Bank of Japan, with no real difference between a permanent commitment to yield curve management at a zero rate and overt monetary finance that is permanent.

Clear enough.

I have discussed helicopter money previously:

1. Keep the helicopters on their pads and just spend (December 20, 2012).

2. OMF – paranoia for many but a solution for all – (November 28, 2013).

3. Overt Monetary Financing – again – (November 18, 2015).

4. Overt Monetary Financing would flush out the ideological disdain for fiscal policy (July 28, 2016).

6. Helicopter money is a fiscal operation and is not inherently inflationary (September 6, 2016).

In his 1969 book – The Optimum Quantity of Money and Other Essays, Milton Friedman introduced the concept of helicopter money.

In Chapter 1 of that collection, entitled ‘The Optimum Quantity of Money’, Friedman introduces “a highly simplified hypothetical world in which the elementary but central principles of monetary theory stand out in sharp relief.”

His aim is to establish the link between the real quantity of money (“the quantity of goods and services that the nominal quantity of money can purchase”) and the inflation rate.

I won’t go into the detail of this simple economy but for economists it just represents a stripped down Walrasian exchange economy that is in a steady-state – no inflation.

In Section III of this Chapter, entitled “Effect of a Once-and-for-All change in the Nominal Quantity of Money”, he conducted a thought experiement, instigated by the following presumption:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

The question Friedman explores is what would the individuals do with that cash.

Would they “hold on to the extra cash”? If so, then “nothing else would happen”. The only difference would be that the “community’s cash balances” would double (according to his starting assumptions).

Friedman thought that “this is not the way people would behave” and so individuals will increase their spending.

He notes that “one man’s expenditure is another man’s receipt”, which apart from the gender-specific language of the time, is a fundamental principle of macroeconomics.

The point of his exercise is to demonstrate that that a chronic episode of price deflation could be resolved by “dropping money out of a helicopter”.

Once the economy was at full employment, then an on-going helicopter drop would simply drive up prices.

There are many misconceptions about the term ‘helicopter money’.

First, newly printed cash (currency notes) is not typically the way that governments spend. Governments spend by crediting bank accounts (and in some cases sending out cheques to recipients), which then are deposited in bank accounts.

The idea that there there is something different about a helicopter drop (usually characterised as ‘printing money’) and other forms of government spending is misleading and not at all illustrative of what happens in the real world.

Second, from the perspective of Modern Monetary Theory (MMT), a helicopter drop is equivalent to an increase in the fiscal deficit in the sense that new financial assets are created and the net worth of the non-government sector increases.

It occurs when the government uses its currency-issuing capacity (linking treasury spending to central bank operations) to increases its net spending, irrespective of whether the government matches its deficit spending by issuing debt to the non-government sector.

The process is clear – the central bank adds some numbers to the treasury’s bank account to match its spending plans. The Treasury might allocate some government bonds to an equivalent value, which would appear on the central bank’s balance sheet.

So, instead of selling debt to the private sector, the treasury would simply allocate some numbers (debt accounting) the central bank, which had created the new funds that match the new government spending.

This accounting smokescreen is, of course, unnecessary. The central bank doesn’t need the offsetting asset (government debt) given that it creates the currency ‘out of thin air’.

So the swapping of public debt for account credits is just an accounting convention.

To understand the consequences of this policy choice, ask the question, what would happen if a sovereign, currency-issuing government (with a flexible exchange rate) increased its fiscal deficit without issuing the matching $ in debt to the non-government sector?

Crucially, governments spend in the same way irrespective of the monetary operations that might follow. There is no sense to the claim that the government requires currency from taxes or bond sales in order to spend it. The government issues the currency after all.

They can tie themselves up in any number of accounting conventions to hide this reality but the reality is the reality.

Without any matching debt issued to the non-government sector, the treasury would instruct the central bank to credit the reserve accounts held by the relevant commercial banks at the central bank.

The commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

The target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).

Taxation does the opposite.

A fiscal deficit (spending greater than taxation) thus means that reserves increase and private net worth increases.

If there are excess reserves created as a result, then this raises issues for the central bank about its liquidity management.

I discussed these issues in the introductory suite of blog posts:

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009)

3. Deficit spending 101 – Part 3 (March 2, 2009).

When the government matches its deficit spending with debt-issuance to the non-government sector it is really only altering the composition of the wealth portfolio of the non-government sector.

This means that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.

The only difference between the Treasury ‘borrowing from the central bank’ and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target.

If private debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the long-time Bank of Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

This analysis allows us to understanding why it is incorrect to equate helicopter money with quantitative easing.

It is a common misperception to make this association, one that was clearly on display among the Committee Members in the House of Lords.

QE is a monetary operation that is nothing more than the central bank swapping bank reserves (central bank money) with bonds (or other financial assets) held by the non-government sector.

It was introduced on the false premise that banks were not lending because they had insufficient reserves. Cure? Boost their reserves. How? Use central bank money which is in inexhaustible supply to buy bonds held by the banks in return for reserves. QED! Right?

Wrong! As we say in Part 1, it is cler that banks do no need pre-existing reserves in order to make loans.

They worry about whether they have sufficient reserves to cover all the net transactions that are drawn on them each day after the fact and know they can always meet any shortfall by borrowing from the central bank.

The only way QE could boost economic activity is through the lower interest rates it induces in the maturity segments of the bonds the central bank purchases.

Remember, by pushing up the demand for bonds in the secondary bond markets, the central bank drives down yields, which then impacts on related interest rates and might induce higher borrowing.

However, this mechanism is unreliable because if borrowers are pessimistic about the economic conditions they will be reluctant to borrow no matter how cheap the loans might be.

The important point is that QE does not produce any new net financial assets in the non-government sector.

The helicopter option is a fiscal intervention which injects new net financial assets into the non-government sector and directly stimulates aggregate spending.

Back to the House of Lords hearing.

In relation to the helicopter money question, Charles Goodhart, a banking academic and former Bank of England Monetary Policy Committee member, then added:

Under the Biden stimulus programme, every family will be sent a cheque for $1,400. If that is not helicopter money, I do not know what is.

The Fed is now arguing that it will not raise interest rates effectively until it sees inflation occurring. If that is not modern monetary theory, I do not know what is.

We are in a very weird world where we are actually undertaking helicopter money; we are following exactly the precepts of modern monetary theory, otherwise known as the magic money tree; and at the same time we are claiming that we are not doing it. We are doing what we claim we are not doing. I find this situation absolutely weird.

So he gets the point about helicopter money – a cheque being posted to households, immediately increases their holdings of net financial assets, and as Friedman understood, would likely lead to increased spending and increased economic activity (given the recessed state of the US economy).

But, Charles Goodhart’s statement also once again exposed the denial or lying of the central bank officials, which Adair Turner had exposed (see Part 1).

Adair Turner put the icing on the cake:

I absolutely agree with Charles that we are denying things that we are doing. This has become the case in the Bank of England and Federal Reserve, but I have believed for over 10 years that the Bank of Japan is doing permanent monetary finance. There are no believable circumstances in which the Bank of Japan will ever sell back the totality of this massive accumulation of JGBs – over 100% of Japanese GDP. There is none in which it will sell them back …

Although the central bank governor, if you ask him, will always deny that he is doing what Finance Minister Takahashi did in the 1930s, which was overt monetary finance …

… It is undoubtedly true that the Bank of Japan is doing permanent overt monetary finance and post facto we will realise that we have done an element of it here.

How about that? Pure MMT.

I wrote about Takahashi Korekiyo in this blog post – Takahashi Korekiyo was before Keynes and saved Japan from the Great Depression (November 17, 2015).

And then it got even more interesting.

Adair Turner was asked if his contention that “permanent monetary financing” can work, why hasn’t Japan “been a model of economic growth or inflation”?

Good question.

This is one of the points I often make – that mainstream macroeconomics cannot explain what has been going on in Japan.

Remember all mainstream macroeconomists predicted (and taught their students to predict) that Japan in the 1990s and beyond would have rising interest rates, rising bond yields, accelerating inflation and many went so far as predicting the bond markets would eventually stop buying Japanese government debt.

They try to weave and duck now after their repetitive predictions have repeatedly failed but history tells us otherwise.

Adair Turner’s response was pretty sound:

Japan’s real growth is not all that bad – its real growth per capita compares very well with the G7-but its nominal growth, which is affected by central bank impacts, has been low and its inflation has continued to be below target.

The issue here is, simply: what is the counterfactual? It is my belief that, if you had not had both continuous large fiscal deficits in Japan, which have been running at about 3% or 4% and are now up at 7% or 8% for the past 20 years, financed significantly by central bank money, we would have a still lower inflation rate and, therefore, nominal GDP rate.

So Japan’s real GDP growth rate (that is, its production rate) has been sound but its nominal GDP growth rate has been low because inflation is low.


In other words, if Japan had have followed the advice of the likes of Paul Krugman and his ilk, it would have been in dire circumstances now.

I would also add that unemployment in Japan is typically very low and the fluctuations from the lowest to the highest levels are relatively narrow compared to the swings we witness in other advanced nations.


So when you hear central bankers telling the public that they are not funding government deficits you know otherwise.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 16 Comments

  1. “If private debt is not issued to match the deficit …”

    Surely “public debt”.

  2. Right on cue, Lawrence Summers is also joining the inflation train: (behind a paywall)

    “It could manifest itself in a period of euphoric boom and optimism that leads to unsustainable bubbles, or it could all work out well. But, it doesn’t seem to me that the preponderant probability is that it will work out well. So I’m concerned that what is being done is substantially excessive.”

    Substantially excessive is a wonderful example of bureaucrat speech.

    “There’s not much argument that the 2009 stimulus, in retrospect, was too small. It was 4 to 5 per cent of GDP over a couple of years, so it was 2.5 per cent of GDP in the first year, against a gap that was 6 or 7 per cent of GDP and growing, so it was perhaps a third or half of that gap.”


    “I could have been comfortable with a headline figure well in excess of $1.9tn if it had been a large-scale, multiyear programme of public investment responding to our deepest societal concerns. But that’s not what this is.”

    Is that really his objection? Doesn’t seem to agree with what his objections were only a few months ago. Summers increasingly sounding MMTish too.

  3. Part 3:

    “Non government sector savings desires.”

    Business, household and pension funds when we set the interest rate to zero

    Something the working class can vote for.

    Would be a very informative read indeed. With context including different scenario’s.

    Japan will provide some of the answers. What are Japanese savers doing with their savings at very low interest rates for such a long time? If Japanese households, business and pension funds simply just save more because interest rates are low to get a higher return. How does that “increased” saving by the non government sector effect the economy ? When does it become dangerous ?

    Or are they moving to riskier assets ? Looking for a higher yield ?

    What does the real data say is happening ? We have a good few years to look at to get the picture. Higher debt to GDP is a give away but surely saving more and more for longer can’t be good for the economy ? Or is it ?

    What returns do they get on their pensions etc ? Is it causing riskier behaviour ?

    Is this the reason why the families in Japan end up looking after their parents ?

    Is it because their savings are so low ?

    What’s the complete story using real data graphs ?

    Would voters vote for that outcome in the UK or US ?

  4. Couple things. President Lincoln created a fiat currency, nicknamed ‘greenbacks,’ in order to finance the Civil War, 1860-65. He did this because the NY bankers wanted to lend at 20% plus interest rates. Lincoln said “I fear the bankers more than I fear the Confederate soldiers!” He then said the government was going to buy a prodigious amount of material, finished goods and services. And pay the bills with greenbacks. Take it or leave it. They took it and as a result the North won the Civil War. As for Japan, isn’t it true that the federal government owns something like 92% of the public debt? Does this public debt=private savings? The private sector did not buy this debt. Japan may not want to admit it, but this is direct monetary injection by the Treasury into the non government sector. Some of the money will get spent, some saved.

  5. The crux of the debate is ..

    Do the working class deserve a decent return on their savings ?

    Some say they do not and have to go to the private sector to get this yield and take on a higher risk attitude.

    I disagree completely. The furlough payments during the virus has shown how pension payments can be paid if a social contract is drawn up. Like if you work X number of years we promise to pay you Y on retirement. The government could provide a full salary pension for every working person and this could be attached to the Job guarantee as a bottom up approach. Without taking a certain amount every month from our wages to do so. It doesn’t need to be linked at all with how much you save over a lifetime into your pension. Or does it ?

    Which all depends if it would cause inflation or not ? That’s the key. Will it cause inflation ?

    As the working groups and retired groups in society compete for the goods and services on offer. Will they push prices up.

    Would it cause inflation if we use this approach ? pensions return to full salary pensions for all provided as a furlough payment by the government when you retire and you don’t take anything off the workers to pay for it every month ?


    Is the only way to do it without providing a full salary pension but by providing a certain amount on retirement that is the same for everyone if they meet the criteria to get it. As in worked X number of years ? A figure that is known not to cause inflation but a lot higher than what people currently get without taking monthly payments from them?

    Then if they choose to go to the private sector on top of that payment to try and get bigger returns. Then the risks need to be made known if they decide to do that. That they could loose their money.

    Out with pensions what return on normal savings can be achieved without the risk of chasing higher yields? Is there going to be provision for this with a zero rate policy ?

    Using a furlough type policy ?

    The virus has shown not only can everyone retire earlier. The furlough payments have shown there are different ways to skin this cat. Increasing productivity policy ideas could in my own view make this achievable.

    What does MMT have to say on the issue?

    Is the current way pensions are paid using a zero rate policy the current way savings get a yield using a zero rate policy – Fair and fit for purpose ?

    I say it isn’t…. We can do so much better.

  6. A follow on comment. What would happen if Japan simply wrote down to zero all the 92% of the debt it created and never sold into the secondary market?

  7. MMT, like all progressive movements which have emerged in the late 20th/early 21st centuries, must BEGIN with the understanding that we live (globally) in an imperialist, ecocidal plutocracy, which has almost total control over both government and media. This dire predicament accounts in and of itself for the failure of progressive movements to gain significant traction and momentum. Lately, I have found myself turning away from the shrillest, often most radical voices on the progressive left, which while purporting to recognize (and accordingly oppose) the reality of imperialist, ecocidal plutocracy, seem unwilling or unable to adjust their expectations and rhetoric to the overwhelming impediment of such a deeply-entrenched status quo. They scream ever more loudly into the wind, it seems to me, as if raising the volume and stridency of their voices could alter the wind’s direction, a wind which has reached hurricane magnitude. MMT has been a welcome exception here, perhaps because it separates its macroeconomic lens from the advocacy of specific sociopolitical reforms (other than the JG). Yet the ultimate value of MMT is thus called into question if it only serves to provide a clearer view of how imperialist, ecocidal plutocracy operates. If the status quo is too entrenched to be changed, however gradually and incrementally, then what purpose is served by understanding it more accurately? More bliss may lie in ignorance. On the other hand, if the status quo CAN somehow be changed, then MMT becomes an invaluable guide in making the right changes. What I’m saying is that progressive interest in MMT is triggered by something which lies beyond it and above it: a faith, seemingly against all odds, in the eventual triumph of truth and justice–a faith, religious in the widest sense of the term, akin to that of David as he strode out to face Goliath. I don’t think we talk enough about this.

  8. Derek, if the government wants to give people money it could do it via interest on bonds or it could do it via giving people money. I can’t see any public purpose that argues for the first method over the second.

  9. Chris Herbert, you ask “What would happen if Japan simply wrote down to zero all the 92% of the debt it created and never sold into the secondary market?”

    We have to consider what is owed by the debt and to whom. The Japanese government (Treasury or equivalent, presumably) created these bonds out of thin air and sold them to the private sector. The private sector bought the bonds using yen (yen are BOJ liabilities created out of thin air). They were subsequently bought by the BOJ using more yen, created out of more thin air. So now the Treasury “owes” the BOJ for the bonds the BOJ is holding. But MMT argues that the Treasury and the Central Bank (BOJ) are both just pieces of the single entity that is the Japanese government, and a single entity cannot owe itself money because owing a debt to yourself does not compute. The private sector for its part doesn’t care about the bonds the BOJ is holding, because the private sector is holding yen not bonds.

    The second part of your question is relevant, though. What if bonds were never created and sold, and instead the Treasury simply wrote checks and the BOJ always cashed them? I would argue that that scenario and the one described above are functionally equivalent.

  10. Creigh,

    Which the whole point. It is a non government sector saving desires – productivity story.

    The furlough payments have shown

    We can all retire so much earlier


    Pension payments can be bigger



    Because of inflation, we seem to be stuck with a model that needs to take purchasing power away from the working population to create room in the economy So that those who have retired can buy the goods and services they need without pushing prices up.

    The virus has shown this model has to be challenged. The furlough payments – people getting paid for doing absolutely nothing shows that clearly.

    It’s a productivity story.

    Introducing job guarentee, reducing the pension age and increasing the pension payment. If we do that how will business react to those 3 things ?

    There’s your productivity story right there. Will business be forced to become more productive ? I say yes they will.

    Taking purchasing power away from those working to create room is just another tax. We have enough of those already. The current model needs to be scrapped and the vast majority of non government sector saving desires needs to be taken away from the private sector.

    If we are going to introduce permanent zero interest policy rate. Then take non government sector saving desires away from the private sector. Then we need to show clearly what’s going to replace it. Which needs to be something the non government sector will vote for.

    As economic policies get added to the job guarentee using a bottom up approach and when good things everyone can have economic policies get implemented using the MMT lens only one thing matters. That one thing is – is the private and public sector produtive enough to handle these changes.

    If not – Then surely that is where things have to start before any of these things are even attempted. Or used to make both the public and private sector more productive. Otherwise inflation will become a told you so story by our critics.

  11. The virus has exposed the current non government sector saving desires models to be ineffecient. If you want the economy to become more productive.

    It would be a shame to let that insight go to waste. We are left with the status quo for another 50 years.

  12. Over the last 9 months I’ve dealt with over £2.3 billions worth of non government sector saving desires that matured giving dreadful returns to working class savers.

    With saving rates so low at the moment it’s not been pretty. The majority of that £2.3 billion has been turned into cash earning 0.01%.

    The working class don’t want to take risk – they want security for their families.

    The MMT response should not be – Tough luck you need to save more at low rates or take on more risk when they don’t want to.

  13. How would you feel ?

    A working class family puts their entire family savings £50K lets say into an index linked bond.

    After 6 years they get £50,125 back.

    They have to pay income tax on the £125 they’ve made over the 6 years.

    So what is the MMT lens going to offer that family that they can vote for ? The same old broken models when we set the rate to permanent zero ?

    When we could actually produce a vote winner. A very big one.

  14. By the way the vast majority of these non government sector saving desires are ” roll overs ”

    Roll overs that kept getting rolled over since the financial crash. As working class families faced so much uncertainty.

    Which only magnifies the problem. When you think of the actual returns since 2008.


    The Australian Office of Financial Management (AOFM) are also responsible for daily cash management of the Official Public Account (OPA). The AOFM issue short term debt in the form of Treasury Notes provide to meet any daily shortfalls in expenditure. The RBA can directly purchase these Treasury Notes by tender.


    The Reserve Bank of Australia and certain other official bodies may,from time to time, apply for Treasury Notes. Amounts to be taken up in this manner will be indicated in the Invitation to Tender and will be additional to the amount offered to the public. Allotments will be at the weighted average issue Yield(s) announced for the relevant tender. 
    The Commonwealth reserves the right to issue Treasury Notes in any manner deemed appropriate  

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