Fed Tricksters, Put Your Monetarism Where Your Mouths Are

 This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/economics--politics-education/fed-tricksters-put-your-monetarism-where-your-mouths-are?post=97455&uid=4798

Monetarists need to step up to the plate and provide a clutch hit in this very serious game of economics. It is a time for action. We have all heard the phrase:
Put Your Money Where Your Mouth Is.
That means to take action to support your claims, most commonly by backing your claims with a bet. It takes nerve and guts to take action to support your claims, in all walks of life. It is much easier to just play tricks on people than to think about the economy.

Well, it is time that monetarists to start putting their monetarism where their mouths are. Monetarists believe that the proper control of the money supply is a key element to the creation of prosperity, and the maintainance of a stable and growing GDP. Clearly, monetarism as defined by Milton Friedman is not operating on all cylinders. This is why monetarism gets such a bad name. It is seen as neo-liberal trickle down asset buying and nothing else. That trickle down has made the rich richer and the poor poorer.

But monetarism could offer so much more and the genius behind monetarism, Milton Friedman, knew it. Before talking about that aspect of genius, I have boiled monetarism down to two basic schools, and one controls the Fed:

1. The Market Monetarists seek more NGDP targeting in place of inflation targeting, which proved futile in the downturn of 2008, as NGDP was cratering and inflation held steady. The tool they want to use to create this stability is asset purchasing. Asset purchasing is sometimes the best game in town in a crisis. But as Mohammed El-Erian said, it falls short and has diminishing returns as time goes on, as it helps wealth gravitate to the top.

2. The New Monetarists control the Fed. I am not always sure they are monetarists, as the Fed often interferes in markets. But clearly, they are for limited monetary intervention. The do a little asset buying and selling and try to control interest rates whenever the market lets them. That limited involvement did not work out so well in the Great Recession, or in the Great Depression for that matter.

Fed Chairman Janet Yellen

The New Monetarists have brought the economy a little way back from the abyss, after they liquidated it with procyclical policies, but neoliberalism has made the poor, poorer, along with globalization and automation. Dropping interest rates actually does not affect these households much when asset prices rise. They generally get a raise by moving in with relatives, not by taking advantage of low borrowing rates.

Low rates cease to be a stimulus. And low nominal rates may even be too high already since growth has crawled to a halt. But going negative can be hazardous if it doesn't work and if there is a big downturn. Real rates are probably severely negative right now. We must consider Friedman at this critical time of Fed paralysis.

But the father of modern monetarism, Milton Friedman, had one trick left in his magic hat. That trick was pure helicopter money. Once the other tools of the Fed, like bringing interest rates lower to stimulate growth or by using asset purchases to stabilize prices, become less effective, the only real tool to make the society prosper is helicopter money. Friedman was not a street corner slight of hand lightweight like Janet Yellen. No, he was a big time magician.

Helicopter money should be distinguished 1. from guaranteed income, otherwise known as Universal Basic Income (UBI), promoted by Charles Murray, 2. from fiscally based QE, 3. from Keynesian deficit spending stimulus.

Milton Friedman did advocate a negative income tax, and helicopter money, but they two different things. Unlike helicopter money, UBI is financed through taxation. That could present a problem, making those who pay taxes more likely to cheat than if there was no UBI. Also, tax cuts promised by politicians could establish a massive deficit if we try UBI, which needs more taxation. And while we do have a negative income tax that is not universal, it is not as far reaching as is a universal and continual grant of money to all the people.

As for UBI, perhaps the economy could one day generate enough real wealth to allow a universal UBI, but I am uncomfortable with going beyond Friedman's negative income tax for the needy.

In Nevada, there is sort of a negative tax, as we have no state income tax because the casinos earn enough to pay the tax. So, elements of the plan for negative tax can be very appropriate.

Helicopter money, on the other hand, is worth implementing, in order to allow the Fed to raise interest rates. It is simply the application of base money to each person equally, within a certain time period, and with the goal of allowing interest rates to rise. It is not based on government debt. 

Base money is Fed money, and if the goal is to repair the balance sheet of the Fed, helicopter money could do just that, and quickly the dent created in the balance sheet by the dispersion of trillions of dollars would be repaired by more economic activity and by more general prosperity and by higher interest rates. Monetarism would create a general prosperity but with the understanding that it was not permanent grants. Without a general prosperity, higher interest rates are a Federal Reserve night time fantasy dream.

So, if we want higher rates, and not be like Europe, and not have monetary policy reach the end of the road and fail, it is time the monetarists started acting like monetarists and back helicopter money. They should make it clear that HM is not Keynesian big government fiscal stimulus, nor is it QE, with bond swapping with the treasury, nor is it UBI!

It is time to really see if monetarists really are monetarists, if they want to follow the genius, Friedman, or if they just don't have the guts to stand for the obvious next step in monetary policy. Come on monetarists, put your monetarism where your mouths are.

I have often wondered if the Fed pumps the threat of higher interest rates to push bond yields up, giving its banks a bargain opportunity to buy! That isn't a way to run the economic system, with slight of hand parlor tricks! No, the real way to run an economy is to fix the problem of declining real rates without pushing nominal rates negative. It can be done. Friedman said so. Follow the genius, monetarists!


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