Fiat Money, Helicopter Drops, Zuckerberg and the Big Myth

This article was published by me on Talkmarkets:

How do we weigh the debate about money, whether it is fiat or  something else? This question has been at the forefront of economic debate since President Richard M Nixon took US currency off of the gold standard. After this discussion of fiat money we can see at the end of the article how this applies to helicopter money in US history as well as a real comprehensive HM for America.

Helicopter money has big advantages over universal basic income which is being pushed by Silicon Valley leaders and Mark Zuckerberg. More on that later. But back to fiat currency concepts.

It is true that US currency cannot be redeemed for gold and many say that qualifies it for the label of "fiat currency".  It is not convertible. But is it backed or secured? At least some of the currency is secured. Federal Reserve notes are secured by assets, Treasury bonds are the asset of choice as well as other bonds, like Ginnie Mae and Fannie Mae. These GSE bonds are used as collateral for Fed money. The Fed is very clear about this arrangement: 

The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.
Fed money generally includes cash, checking accounts, and easy to access money. But there is a different kind of money. That money is called broad money. It is created by banks when they make loans. People say over and over that this is fiat money. They say this is money created from nothing with no value.

Courtesy: National Numismatic CollectionNational Museum of American History

But most loans, and large loans, are secured by collateral of the borrower. Mortgages are secured by the house. Really big loans are secured by a different kind of collateral, a derivative. Investopedia says a derivative is an asset in that it is derived from underlying assets:

derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset.

A derivative is a contract, but it also is a security, and therefore an asset! It appears that loans backed by collateral, and big loans backed by derivatives, and collateral on top of derivatives, are not what most people think of when they think of fiat money. They are secured money. Most new money issued in America is secured by something. It is a myth to say it is "fiat" money as if it is just created by decree without backing.

So, banks create secured money, as far as broad money is concerned. And that money is secured by derivatives based on real physical assets, or debt transformed to assets, like mortgage backed assets, for the most part. There is a debate about unsecured loans being fiat money. But that is for another time.

So, what about Helicopter Money? The question is how helicopter money would be dispensed? Would it be exchanged for bonds from the government? That would be sterilized, and it would be likely not do much for the economy. It would be better than nothing, but the government could owe a whole lot more and may need to cut back spending.

But what if helicopter money was dispensed for just a short time with no backing of bonds? This is what Scott Sumner says about the idea of increasing the money supply in similar fashion:

...because one time changes in the money supply probably don’t shift the real demand for money in the long run.  This is a somewhat weaker version of the QTM, but is the most defensible version.  In my view the QTM is most useful when there are large changes in the supply of money, and/or over the very long run.  Especially when there are large changes in the supply of money, year after year, over a very long period of time...
 One time careful administration of helicopter money, as Eric Lonergan has said from 6 to 18 months, will likely not fall under the effects of the Quantity Theory of Money (QTM). Increasing the money supply, even by a lot, would not likely create equal inflationary gain if limited by time. 

Sumner does not subscribe to the following affect if money supply is increased over a short period of time, but he would agree to the theory if practiced over a long period of time:

The assumption of a unit elastic demand for currency leads to the Quantity Theory of Money.  If you double the money supply, the value of money will fall in half, and the price level will double.
So, real fiat money is  money based on no backing, for a short period of time. It would be similar to Greenbacks issued by Abraham Lincoln. They were not backed by gold, only by the credibility of the US government. For me,  Greenbacks are real fiat money. Money backed by assets looks more like money backed by gold than it looks like Greenbacks.

So, if anyone asks if helicopter money was established in the US before now, it certainly was. There is no reason why it cannot be done again, especially now that there can be little debt forgiveness in a derivatives world. Even bankruptcy laws have been written in such a way as to limit real debt forgiveness.

But, helicopter money does not violate the Quantity Theory of Money. Universal basic income, as stated above, being pushed by Silicon Valley CEO's, would violate QTM by being a continual attack on the money supply Inflation of a distasteful kind would be the certain result of this misguided policy.

Also, using very little money or assets to secure big positions in any market has proven to be a bad idea for banks, and has more of a fiat feel to it than behavior of the dollar itself. That leverage is much more risky than money issued with collateral fully backing it, as is most of the money created in the United States.

Most money is backed by something of value. It looks more like gold backed money, but only without the convertibility. The only real fiat money is money not backed by something of value, like we saw in Greenbacks and we would see with Helicopter Money in the future.

Most people who criticize our money and want a return to the gold standard depict it as irresponsible money printing. We must, at least, make a distinction between money just printed by the presses, and money printed by the presses that is backed by collateral of some sort. Fiat money backed by securities, if you want to call it that, can be created "responsibly". And helicopter money cannot be created over long periods of time, making it responsible as well. 


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