Helicopter Money, Not Bond Destruction, Must Replace Debt Forgiveness

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/bonds/helicopter-money-not-bond-destruction-must-replace-debt-forgiveness?post=136378&uid=4798

It does not look like Donald Trump is going to break through the New Normal of derivative economics. Derivatives present a very big problem for governments as they force government to reject debt forgiveness, to people or to other, weaker, governments, even when it makes perfect sense. The concept of  Jubilee and debt forgiveness functioned in history in a way that it cannot now. 

We can look at the history of debt forgiveness briefly, and then explain why Helicopter Money must replace this old method of balancing economic interests. Ellen Brown explores some solutions, including one very problematic one that I address later, as solutions to the possible need for write downs in the EU.

Most everyone knows about the Jubilees of Old Israel. But debt forgiveness was a manifestation of the strength of some empires through history as well: 

One of the main arguments we make in our new book is that debt forgiveness makes a lot of sense when the economy experiences a large-scale negative shock that is beyond the control of any one individual.
History seems to understand this lesson well. The 48th provision of the Code of Hammurabi, written more than 3,500 years ago in Mesopotamia, states that: “If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not growth for lack of water, in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.” The main threat to economic activity in ancient Mesopotamia was a drought, and one of the first legal codes understood that debt should be forgiven if such a negative shock occurred.
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Farmers were bailed out in the US in the 1800's, by politicians protecting them from creditors. Can you imagine that sort of thing happening now? How many homeowners were protected from creditors in the Great Recession?

There are other countless examples in history of debt forgiveness. Brad DeLong mentioned the House of Debt book in a review, and said this:
All I can say is that I thought that this was the system that we had. I thought–from the Great Depression era history of the HOLC and the RFC, from the 1980s history of the Latin American debt crisis, from the 1990s history of the RTC, from innumerable emerging-market crises, et cetera, that we understood very well that this is what we should do. Whenever the financial system got sufficiently wedged we resolved it–we turned debt into equity, and we crammed losses down onto debt holders whose investments were ex post judged to have been ex ante unwise.And from my standpoint the true puzzle is why Bernanke, Geithner, and Obama were so uninterested in pulling out the Walter Bagehot-Hyman Minsky-Charlie Kindleberger playbook and following it in housing finance from 2009-2014. Did they read no history?
I believe the Fed leaders read history. I believe leaders of the ECB read history. They just don't want to repeat history in the age of derivatives! So much is derived from debt, and is riding on debt, that these economic leaders simply cannot accept the thought that debt may not be repaid, that default could happen. In this new normal, things won't work that way. Debt must be repaid! Of course, governments go through hoops to avoid an official triggering of default. I suppose that is a never ending solution which solves nothing and introduces crushing austerity.

There is, of course, a perfect solution, and it does not involve write downs at all. Helicopter money can be issued in extreme circumstances by the central banks. Balance sheets can be expanded carefully, and some of this helicopter money, from Fed base money, could be directed toward paying down debt. That would not be a purely inflationary act, but rather would be partially sterilized if some of the money was used to pay down debt.

Helicopter money could be issued to every man, woman, and child in America and also to government to be split between lowering debt and fixing roads.

Helping labor would ultimately return benefits to the real capitalists, the ones who make and sell stuff, in the form of increased aggregate demand. Even the bankers would see increased deposits.

I know and like Ellen Brown, and believe she is in the forefront of trying to make the banking system more equitable. Some of her solutions to central banking are not financially sound, however:

1. Ms. Brown believes that the government could issue money, not created by debt, but just by government fiat. I think that is an unnecessary and possibly inflationary solution. It would be a job better performed by a central bank.

2. She also believes bonds should be taken out of service. In the age of derivatives that is actually a bad idea. We need more sovereign bonds, not less. We can't have governments retiring bonds when we are close to shortages. When the Fed does that it simply drives yields down and demand up.

It is like slowing real estate construction thinking that will drive house prices down. It just doesn't work.

Ms. Brown wants to increase the money supply by retiring those bonds, which are an alternative form of cash. But bonds, in the age of derivatives, are more valuable than cash, both for derivatives and for collateral that backs derivatives. So that cannot help. Increasing the money supply by real helicopter money, would be a form of QE for the people, but not destructive as QE is, of the bond supply. We can't just think about the money supply anymore. We have to consider the bond supply.

Bonds could not be retired until and unless a substitute could be found for them in the financial markets. That is just reality. Yes, governments are not sufficiently sovereign, as Ellen Brown says. But debt is gold to Wall Street. If people are ready to financially overthrow Wall Street by taking away bonds, the cure would likely be worse than the disease. There are other ways. Helicopter money is the default other way, the only way as Kyle Bass has said.

If central bankers and politicians sit back and let Donald Trump destroy the safety net for the poor in order to give a perverse form of Helicopter Money to the wealthy, only, that government will reap the ultimate rewards of a society even more divided. It is time for the bankers to step in and do the right thing. It is time for a Helicopter Jubilee.


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