Frances Coppola on M and Helicopter Money

This article was first published by me on Talkmarkets:

Frances Coppola is a very helpful blogger and economist who is widely published and well respected. She takes a dim view of asset inflation as many economists rightly do. She knows that there has to be a better way to stimulate the economies of the developed nations. While she believes deficit spending is superior to QE, She is not opposed to helicopter money but is possibly denying its value as opposed to fiscal deficit spending. More on that later.

But first, we should see what her argument is against QE. Basically, she explains in a fantastic and fundamental way, the QTM, the Quantity Theory of Money, MV=PY. Basically she says that the left side of the equation MV, meaning money supply times velocity is affected by the right side of the equation, PY, which is price level times yearly output. So, MV is affected by PY, not the other way around. And PY is nominal GDP.

So, simply put by Frances Coppola:

"If M is fixed, then when Y is rising either V must rise (money must circulate faster, which implies people spending more frequently) or P must fall. But when P is falling, people tend to delay purchases, which slows the velocity of money. So falling P tends to be associated with falling, not rising, V. Thus, if M is fixed, Y will eventually stagnate or even fall.  M should be allowed to rise as Y rises, keeping the price level stable.
So, far from dissing it, Keynes in effect used the QTM himself. And yet he is definitely critical of it. So what is he really complaining about? His objection is to ACTIVE expansion of the money supply in order to stimulate output."
So, M is not broad money, but rather is the monetary base, or base money. M is not a large amount compared to broad money, which is created by banks when loans are created.

So, increasing M which never gets to the people, according to Coppola, is not going to do much for the right side of the equation.

QE did not cause inflation because M went to the banks and the wealthy and it was not available to mainstreet, and Frances Coppola seems to understand the value of the equation when she says:

The problem is that in the modern monetary system, only a small proportion of money in circulation is monetary base. The rest is what we call "broad money", which is created by banks in the course of lending. And when banks are damaged, they don't lend. No, let me widen that. When private sector balance sheets are damaged - people are over-indebted, their credit ratings are shot to pieces and they are struggling to service their existing debts - banks don't lend and people don't borrow.
It's self-reinforcing: banks tighten credit standards to shore up their highly risky balance sheets just when the balance sheets of households and businesses are at their most fragile. We blame banks for not lending, while simultaneously demanding that they make themselves less risky: we blame businesses for not borrowing to invest in new capacity, while simultaneously encouraging households to cut back spending in order to pay down debt and save for the future. And into the middle of this steaming pile of double standards and conflicting messages, we pour enormous amounts of monetary base, in the mistaken belief that it will encourage banks to lend and people to spend. The truth is that it has very little effect on either. 
She goes on to say, and I agree with this also:

If what you want is to encourage people to spend, you must increase the money available to those most likely to spend it.
Simply buying the assets of the rich is not going to make much difference to economic activity. So helicopter money would be far better than QE as a monetary stimulus.
She thinks it is deficit spending, but I think that is incorrect:

So now we propose helicopter money and "people's QE" as a way of doing deficit spending while pretending we are not. Is anyone really fooled?
I believe that Japan has expanded its balance sheet to over 90 percent of GDP. The Fed is at a low 25 percent. The central banks can expand their balance sheets enormously to infuse base money into the pockets of the people directly. There is no reason why that cannot be done. That would mean that Coppola's worries that helicopter money is deficit spending are unwarranted, and that:

1. There is plenty more base money available.
2. The base money issued directly by the central bank is not deficit spending at all, being accompanied by the issuance of a perpetual bond or no bonds at all!

So, Frances Coppola is almost on board with helicopter money and Eric Lonergan explains it well:

Responsibly Expand the Monetary Base Before It's Too Late

The truth is, as Lonergan says at the end of this article, inflation targeting could still be accomplished if money is put directly into the hands of the people. I would say the truth is this, the average guys on the street are fed up drinking at the trough of borrowing. They don't like borrowing and banks don't like lending to them.

Expanding M does nothing if it is for excess reserves or even for lending, if people don't want to borrow. But helicopter money would be the only successful use of M unlike all other increases in M that have left main street balance sheets in tatters. Frances Coppola, and others who are not opposed to HM, need to be convinced simply that this is not deficit spending. In the meantime, many thanks to her for her clear insight in opposition to asset inflation as a means of helping the broad economy.

For further Reading:

Great Recession: Coppola's In Betweeners and Central Banks


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