The social justice equivalents in monetary policy are Modern Monetary Theory (MMT) and quantitative easing (QE) for the people. Desperate to save face and be liked again, the outgoing chief of the European Central Bank (ECB), Mario Draghi, is trying to throw anything at the wall to see what sticks, including even more big government tools. Draghi and the ECB were apparently not statist enough and were just being held back by their modicum of adherence to the principles of free-market economics!
A Draghi Queen
Recently, former Federal Reserve Vice Chair Stanley Fischer co-wrote a paper for BlackRock Investment Institute, titled “Dealing with the Next Downturn.” In the report, Fischer encouraged governments to put money “directly in the hands of public and private sector spenders,” though he proposed something different to the helicopter drop, which is the concept of supplying vast amounts of money to the people.
When asked by European lawmakers about a helicopter drop transferring stimulus to the hands of the people, Draghi recommended that the Governing Council be open to these new ideas. He did note that it is a fiscal task for the government, not the central bank. Or, in other words, his term ends next month, so what does he care what his successors do moving forward?
Although his comments were brief, there is still quite a bit to unpack.
Get to the Chopper!
All the unconventional monetary policy tools employed by the ECB and the deficit-financed stimulus measures executed by the governments of Europe since the financial crisis have failed. The European economy is a lost cause, and even Draghi concurs as he warned officials that the economy faces more “prolonged sag.” The latest manufacturing numbers support his claims; the manufacturing purchasing managers’ index (PMI) clocked in at a worse-than-expected 45.6 – anything below 50 indicates contraction. It’s a lost cause.
The ECB has deepened interest rates into negative territory and relaunched QE, but these nostrums will likely only offer a temporary boost – nothing more. It is much like that two o’clock sugar snack that lifts you up for a few minutes and then brings you back down to Earth, eventually leaving you chained to that Snickers or Coffee Crisp every weekday afternoon. Unfortunately, Brussels and Frankfurt have one last resort to resuscitate Europe: MMT and helicopters.
MMT, which is certainly not a new concept, is still money-printing but with a caveat: The newly created money is injected into the Treasury’s veins and not credit markets. By doing this, governments can issue their own currencies and spend themselves into oblivion as if it were their last day on the planet. The state can immediately consume this fresh cash on abortions for men, gender reassignment surgeries, and government-guaranteed jobs – a progressive paradise!
Now, it is not new for a couple of reasons. The first is that central banks have monetized the debt by acquiring government bonds. This policy maneuver enabled politicians to spend like drunken sailors on wasteful projects that were prime examples of Frédéric Bastiat’s That Which is Seen, and That Which is Not Seen. Bridges to nowhere, infrastructure projects for photo-ops, and underutilized rail lines – it has all been done before.
The second thing is that it is much like helicopter money. The framework behind this theory was developed by legendary economist Milton Friedman (gasp!) in 1969, but it entered the popular vernacular in the early 2000s. Under this monetary policy tool, the central bank or the federal government would distribute huge supplies of cash to the public in a low-interest-rate environment where economic growth is weak. Who would love nothing more than big piles of cash at our disposal?
A couple of the obvious side effects, of course, are that even greater money-printing, especially by the hands of politicians, would erode the public’s purchasing power and possibly trigger inflation greater than the 2% target. What is to say that the people, like the financial markets, would not get addicted to these injections? It is clear in the equities arena that investors are hooked on cheap money.
Or, since the objectives of QE failed, what if the people bank their cash in the microwave and under the mattress instead of spending it on new microwaves and mattresses?
The smartest men in the room are not so smart, after all…
Monetary Alphabet Soup
It might be more fascinating at this point to wonder what would have happened if governments and central banks had not intervened in the aftermath of the recession. All these grand visions to facilitate growth would have been avoided if policymakers and bureaucrats abstained from economies and markets and allowed the recession to cure malinvestments and curb the excesses. If this had happened, then we would not need to be fixated on the monthly Federal Open Market Committee (FOMC) minutes, subzero interest rates, and the QE and MMT flavors of the monetary alphabet soup. How did we get to this point and where the heck did that decade go?
Robert Nathan’s poem from Portrait of Jennie is quite fitting: “Where I come from. Nobody knows; And where I'm going. Everything goes. The wind blows, The sea flows – And nobody knows.”
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