Hope for the Real Economy, Pigou Effect, TLTRO Helicopter Money

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/education/hope-for-the-real-economy-pigou-effect-tltro-helicopter-money?post=101055&uid=4798

Eric Lonergan defined, precisely, direct applications of helicopter money sans fiscal burden on governments. Now Mr Lonergan is defining a new kind of helicopter money, with the same principle of base money but through a lending mechanism from the ECB to banks that has a perpetual quality to it.

Lonergan explains a mechanism by which the ECB is actually involved in a program of helicopter money. Certainly, the Eurozone, in my opinion, is not the ideal venue for this process, because of issues regarding the fusion European State. But as things quiet down to a sort of equilibrium and status quo there, it appears that the central bank, the ECB, is really on the ball when it comes to monetarism.

Lonergan has said that other central banks have not taken monetarism and helicopter money seriously enough. So, here is the plan for the Eurozone as he explains it:

There are two types of  interest rates. One is the official rate. It is negative in the Eurozone. Lonergan gives arguments that this rate may be causing a tightening. This is not necessarily the view of market monetarists, who I have written about often, depending on which side of the bed they role out of in the morning.

But for Lonergan, there is evidence for this tightening.  Lonergan points to Japan as proof, early proof, that negative rates may result in a slowing of the economy and a strengthening of the currency.

The second type of interest rates is what is called the Targeted Long-term Refinancing Operations
(TLTRO) and goes according to the Friedman rule, that the central bank is never impotent, though so many monetarists seem to think so these days.  Lonergan says:

But what if households held all the base money, and furthermore the amount was increased dramatically? Surely then a Pigou effect would be large. This line of reasoning in fact pointed me towards cash transfers (as I argued in the FT in 2002).
I was reminded of this line of reasoning when recently re-reading Milton Friedman’s 1968 AER presidential address. It is famous for its critique of the Philips curve. Reading it today, it is far more interesting for its perspective on Keynes – presenting a much more interesting perspective than that of today’s “New Keynesians”.



And as quoted by Lonergan, Friedman himself said, in defense of base money being held by the people as a more affective tool than QE and asset purchases by the Fed:


“This revival [of belief in the potency of monetary policy] was strongly fostered among economists by the theoretical developments initiated by Haberler but named for Pigou that pointed out a channel – namely, changes in wealth – whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates. These theoretical developments did not undermine Keynes’ argument against the potency of orthodox monetary measures when liquidity preference is absolute since under such circumstances the usual monetary operations involve simply substituting money for other assets without changing total wealth [i.e. QE]. But they did show how changes in the quantity of money produced in other ways could affect total spending even under such circumstances. [italics added]”...
...Whatever one calls it, what Friedman and Haberler are clearly arguing is that cash transfers to households financed by base money would stimulate demand under deflation and the transmission mechanism is rising real balances. Base money is not a liability, so Ricardian equivalence – if you care about it – is not relevant. And neither if one thinks about it, is the issue of “permanence”.
With the TLTRO, the ECB is never out of bullets. Lonergan says :

With every TLTRO the ECB chooses the interest rate, the duration of the loan, and potentially, the credit risk. Why is this potentially more important than all other monetary tools? Because the ECB is never out of ammunition with a TLTRO...
Eric Lonergan goes on to say that negative rates are possibly a tightening, because as they go more and more negative, the result is that the banks are taxed. The TLTRO avoids that tax, and makes it possible for the official rate to stay positive.

While Lonergan is not specific on the nuts and bolts of the resulting policy toward the retail household, it appears that the banks could use that base money to offer perpetual zero interest loans or other innovative financing to help households and non financial businesses, in other words, the real economy.

I will be watching for more information on the outworking of this program as it effects the retail consumer. I hope we will get more from Eric Lonergan as the program unfolds. Base money in the hands of the people would create wealth and would not burden governments and would not simply swap one set of assets for another as QE does. 

For further reading:

Targeted Longer-term Refinancing Operations

Can QE Rescue the Eurozone (Video)

Fed Tricksters, Put Your Monetarism Where Your Mouths Are

Wikipedia Pigou Effect

Wikipedia Arthur Cecil Pigou



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