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Helicopter Money

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A great deal can be learned about the government’s response to this crisis, as well as the mistaken policies that necessitated it, by analysing a speech delivered by Ben Bernanke on 21 November 2002. At that time, Bernanke was a Governor of the Federal Reserve. The speech, to the National Economists Club, was titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here”. In light of subsequent events, Bernanke’s comments expose his misunderstanding of the state of the US economy, and, in particular, the forces driving it. This is important because the policies he advocated in that speech are the ones that have been employed in this crisis. Those policies were conceived as a solution to an economic situation Bernanke did not understand. Consequently, they will not cure the imbalances that caused the New Depression. In the short run, their effect will be palliative at best. Over the long run, unless combined with new policies to restructure the US economy, they will only exacerbate past mistakes and permanently undermine American prosperity.

Bernanke gave this speech soon after the collapse of the NASDAQ bubble, when deflation threatened the US for the first time since the 1930s. His ideas about how to prevent deflation are important if we are to understand his ideas about curing it. He began by stating, “I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small …” He went on: “A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape.”

At the end of 2002, the US banking sector was not healthy, and it was certainly not well regulated. Within five years of those remarks it began to collapse, pulling the global economy down with it. Nor were household balance sheets in “good shape”. American households had never been more indebted. As for corporate balance sheets, who can say what condition they were in, given the long series of accounting scandals involving Enron, WorldCom, Fannie Mae, Freddie Mac, and many others?

The Fed governor went on to discuss the causes of deflation and its relationship to aggregate demand:

“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand—a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress.”

Next, Bernanke suggested it would be far better to prevent deflation rather than to be forced to cure it once it had taken hold, as it had in Japan:

“The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation.”

According to Bernanke, then, deflation is caused by a collapse in aggregate demand and can be prevented by using monetary and fiscal policy “to support aggregate spending”. But he does not address the question of why aggregate demand would collapse in the first place. Nor does he explain why the economy cannot be righted by market forces but instead must rely on government intervention to hold off deflation.

These questions are too important to overlook. Deflation took hold in the US in the 1930s and in Japan in the 1990s because policymakers in those countries failed to prevent credit bubbles from forming there in the 1920s and the 1980s. Credit bubbles cause aggregate demand for goods and services to expand far beyond the point that can be sustained by the underlying income of society. That is why aggregated demand collapses when the credit bubble pops. Therefore, it must be understood that deflation is the consequence of misguided government policies that allow the formation of credit bubbles. Bad policies were responsible for the NASDAQ bubble. Its collapse produced the deflationary pressures Bernanke was discussing in 2002. Bad policies are also responsible for the deflationary threat now confronting the US following the rise and fall of the housing credit bubble.

Bernanke ended by describing what the Fed could do to cure deflation in the “unlikely” event that prevention did not work and the overnight federal funds rate fell to zero: The following excerpts convey most of his recommendation on the subject.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. …

Of, course the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. …

Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association). …

Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasure bond prices and yields at other than the shortest maturities. …

If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, banks loans, and mortgages) deemed eligible as collateral. …

Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.”

While most of those measures were not required in 2002-03, they have been put into effect since 2008. Their purpose is to prevent a contraction of aggregate demand after a credit bubble has burst. This policy is inherently flawed because it fails to recognise that the bubble (and the aggregate demand it created) could not be kept inflated indefinitely by the private sector because the private sector did not have sufficient income to sustain it. It is no cure to use aggressive fiscal and monetary policy to inflate a new credit bubble to replace the one that just burst. The second bubble will be no more sustainable than the first.

The policies employed to prevent deflation and support aggregate demand after the NASDAQ bubble burst were only a mild version of those laid out in Bernanke’s 2002 speech. Aggressive fiscal and monetary measures were implemented that pumped up aggregate demand by fuelling the US property bubble. That approach worked in the short run: the US experienced no significant deflation at the time. Over the long run, however, those policies made matters very much worse. If private-sector income was insufficient to support the NASDAQ credit bubble in 2001, how could anyone have supposed that it would be sufficient to support the much larger housing credit bubble a few years later?

Yes, as Bernanke pointed out, “Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero”. That is certainly true in the short run, but what is the exit strategy? Given the scale of government intervention required to prevent complete economic collapse during the last three years, at this rate, a continuation of the fiat-money bubble-blowing strategy will soon end in nothing less than total collectivization of society.

The policy response to the New Depression has not cured the causes of the economic breakdown, it has merely nationalised the cost of attempting to perpetuate them. Once the bubble began to collapse, there was no realistic alternative to nationalisation. Nationalisation has kept the patient alive. A radically different policy will be required, however, if the patient is actually to be cured.

Having dropped $2.3 trillion of helicopter money so far, Washington still does not understand any of this. QE 2 ends today. Expect to hear a loud hissing sound as the global credit bubble begins to deflate. The next round of helicopter money is very likely to begin before the end of the year.

Please note: The Corruption Of Capitalism is now available on Kindle.


  1. Dear Duncan,

    I appreciate your work and books. Since I´ve read “The Dollar Crisis” and “The Corruption of Capitalism” my understanding over the capitalist economic system expanded a lot and I’ve began to understand deeply its flaws and think we need to design a new international financial system that be sustainable.

    In respect to the US economy it’s a pity that the politicians and decision makers did not see their country is suffering from a rare economic disease called by Richard Koo “balance sheet recession”. When a country suffers the balance sheet recession actions like QE (printing money) and lowering interest rates don´t work as we can see from the current economic facts of US.

    I hope these politicians open their eyes and decide correctly, otherwise, american people will suffer the consequences of their mistakes.



  2. Greed Cancer Cells Also Follow Laws Of Evolution
    Failing Treatment Of Economic Collapse Simplified
    https://www.beezernotes.com/wordpress/?p=2781#comment-12281 (May 18 2010)
    A. “Survival of the fittest: even cancer cells follow the laws of evolution”
    Of course. Expected. Cancered cells proliferate. The energy constraint of their genome is enhanced. Their genes effect ingestion of the energy of their host cells in order to survive. They proliferate, evolve. Yes, theirs is a shorter survival time, postponement time of loss of energy, shorter than the survival time of uncancered organism’s cells. But, like and even more than most humans, they instinctively act per the encountered circumstances. This is evolution. This is natural evolution.
    B. Life genetics is driven by culture. Culture is a ubiquitous biological entity
    There is natural ubiquitous evolution and there is human cultural evolution. Humans evolved language, that became a biological entity.
    Whereas nature’s evolutionary rungs are gains or losses of energy constraints for few “fittest” at ongoing circumstantial constellations, including modifications of genetic expressions, some Western cultured groups assess and extend the prospective temporal limits of evolution beyond the immediate scenario. They manipulate the circumstantial constellations, postponing or modifying natural evolution, to gain enhanced energy constraints for a community much larger than of “few fittest”. This is what all levels of politics are about. Local, national and international.
    C. Greed cancer cells also follow laws of evolution, with money being humans’ cultural energy.
    Not only physiological cancer cells follow the laws of evolution. Human greed cancer cells follow them, too. Evolution is evolution.
    EOTOE. The total amount of cosmic energy is constant even if mass diminishes with the ongoing expansion. Hence the universal melee of mass formats specimens to ingest each other’s energy to survive. Ingesting energy translates into ingesting mass, which is the other face of energy. Humans artificed money and its ethics to stand for energy. The ideal ethical goal per the 20th-21st centuries technology culture is amassing money, the human energy artifact. Humanity’s present technology culture is founded on the brilliant idea that whereas in nature it takes work, converting of mass, to ‘amass’ energy, humans will – instead – print money, print it and base on it a make-belief culture, founded on make-belief energy. Printing money, posits the brilliant thinking, enables us to bypass nature, to spend more energy than we actually amassed.
    D. So again and again, the present economic collapse will not be repaired by mechanisms but by basic cultural modifications
    The greed cancer cure requires a prolonged resolute determined change of culture, of values and ethics and goals of consumption and living modes and patterns.
    Dov Henis
    (Comments From The 22nd Century)

    Quote: “Does the comment by Dov Henis make sense to anyone?”
    Yes. It does. Plain and simple.
    The greed cancer evolved and persists biologically. “Human nature”. Its cure requires modifying of a natural process, i.e. cultural modification. Trials of various mechanisms within the present Technology Culture will not cure anything. They will ONLY buy VERY LITTLE time and will inevitably lead to a greater collapse…
    Plain and simple, but who is prepared to indulge in a prolonged resolute determined change of culture, of values and ethics and goals, of consumption and living modes and patterns. It is much easier to play hopeful make-belief with mechanisms…

    1. Cancer cells are an inevitable by-product of mutation which is the evolutionary process that helps an organism to better adapt to the environment. So cancer will never go away, just as bacteria will never go away no matter how much anti-biotics we consume. The same applies to financial cancer.

      CK Yeung

  3. “QE 2 ends today. Expect to hear a loud hissing sound as the global credit bubble begins to deflate. The next round of helicopter money is very likely to begin before the end of the year.”

    Loud and hissing sound it is indeed!

  4. I’ve only been interested in all this for the last three years.
    I find it fascinating that Bernanke told us ten years ago what he would do.
    Why do I never hear any of this, anywhere in the MSM ?
    Not even the MSM’ers who are a bit radical ?
    While Bernanke was making this speech, we were being told to buy more stocks, houses and stuff.
    Why ?

  5. From
    PO Box 509. Milnerton. 7435. Cape Town. South Africa.
    Tel: +27 (021) 551-3155. Email = egay@mweb.co.za
    Monday, 6th. July, 2008.
    Editor. Cape Argus.
    The economy is in a mess. The world is in a mess. How did we get into such a mess? We have been led here by the nose which we refused to see past. Who led us here? Our leaders of course. Why did they lead us into such a mess? Because they want to be admired, praised, fawned on and to remain in the driver’s seat as long as possible so, like doting parents in the family car, they took their darling children to Disney Land and all the nice places they wanted to go to in order to keep them happy and quiet. So we have been taken for a ride. After all, adults are only grown up children and they, too, love to live in their make believe world for as long as possible.
    Politicians can see no further than the next election and, when they have conned (at huge cost) the gullible masses into voting them into power, they spend too much of their time and our resources hanging on to that power at all costs. Big Business can see no further than the next dividend, huge bonuses for themselves and maximum profits for the shareholders. This when we are desperate for leaders who can see far over the horizon and, like good parents, not afraid to take their children to places they do not wish to visit, but will benefit from doing so.
    Both the politicians and captains of industry are focused on selfish and short term gains for themselves at the expense of long term stability and prosperity for all. And so we will continue to stagger from one crisis to the next, applying piece-meal expedients which merely buy time until the next crises. Is it any wonder that we are now suffering a major economic crisis after decades of mismanagement? The market is merely correcting itself and the correction will be as long and severe as the abuse that preceded it.
    So we are getting precisely what we deserve for allowing our leaders to drive us to all the nice places where we can have a good time and continue to live in our make believe world, enjoying the piper playing the happy tunes, but who will, too suddenly and unexpectedly, stop the music and demand to be paid.
    Over the past few years I have increasingly lost confidence in our political leaders, and think that it is time to make some very significant changes if we are to rid ourselves of the scourge of party politics, under which all countries could end up as another Zimbabwe and other failed states. It is time to consider alternative ways of making decisions that affect, not only our own lives, but future generations too.
    If we can’t rid ourselves of self serving politicians entirely then I suggest that they be relegated to a mere advisory position in a panel of eminent experts in their field. For example, the environmental ministry could consist of a panel of committed and proven environmentalists to reach consensus on environmental matters, with the politician merely advising on the possible political ramifications, but whose opinion would count for no more than that of the other panel members. It would help, too, if all the panel members were grandparents with lots of lovely grandchildren whose futures would be factored into the equation.
    With the modern communication technology available today, the members of, say, the Environmental portfolio could have their own private website where matters could be debated and then a vote taken. The politicians would have no choice but to implement it. This is true democracy at work, i.e. being done and being seen to be done; a great improvement to promising and lying to the gullible masses every 4 or 5 years, and then doing what the hell suit them at that time.
    Politicians and big business are not serving the population. Political populism is mass hysteria and a poor indicator of a person’s real worth. It is now time to start moving into survival mode for the entire world’s population, not just for a self serving few. We have created a fat cat economy which favours the rich, who favour their own rich man’s club to the exclusion of the poor and hard pressed. We must start seeing the wealth gap steadily and progressively closing. I fear for our future if politicians and big business are allowed to continue as they have done hitherto. What kind of a world have we created for ourselves when the mentally deranged leader of Zimbabwe can cling onto power for so long while systematically bringing rack and ruin, death and destruction on the country and its hapless population, which now has the lowest life expectancy in the world?
    With leaders who we can implicitly trust, and who set a fine example, we will soon learn to adapt to new, more inclusive methods of ensuring our future security and well being. We are crying out for such a change of things. But where are such leaders? Don’t put too much hope in Obama. I fear we will only get more of the same, but in different packaging from him although, I must say, he has impressed me with his business like no-nonsense approach, up to now. However, bail-outs for those who got us into this fine mess are not the answer to our woes. Do the multi-millionaire captains of industry who flew to Washington with their begging bowls, in their private jets, have no pride, or a conscience sensitive enough to question the whole morality of their self created situation? Apparently not. They still want more of the same stuff and refuse to contemplate any other remedy which may be just a little too bitter for them to swallow. Even porn merchants are now demanding government hand outs!
    Nearer to home: is a polygamist who barters for his brides, as he would his other chattels, the right kind of person to lead a sophisticated nation by example? Are there enough females for every man to have 3 or more wives? Are there enough kindergartens and schools to accommodate everymans’ 20 or more children? Or must other less than equal mortals be forced to live a lonely and deprived existence in order for the fat cats of the world to enjoy more than their fair share of everything? That the moronic masses who, themselves, can see nothing immoral, or undemocratic in this, strikes fear in the hearts of all moderate and responsible citizens. With the arms deal skulduggery, Travelgate, and all the food price fixing scandals, our present leaders more resemble a Mafia than the irreproachable individuals they should be in order to serve the citizens of this country honestly.
    I’m sure that I am not the only one who has lost confidence in our leaders. Surely there must be some way of ensuring that our future leaders are people of good standing, integrity and honour, and who are prepared to serve us, not for all the trappings of position, glory, self-aggrandisement and enrichment, but who are prepared to remain humble, modest, and to leave office with little more than when they entered it. If we cannot produce such leaders then what hope is there that the human situation will improve and disaster averted?
    To show their strong conviction to their calling, some people take vows of poverty, chastity, and silence. I don’t expect politicians or business tycoons to do this, but there must be some such oath that is enforceable when errant politicians break their oath to their own calling. Do business tycoons have to take an oath? As it is now, they are doing what they like and getting away with it, because it all seems so “normal”.
    Ernie Gay (Milnerton) PO Box 509 Milnerton, 7435. Tel: (021) 551-3155.
    (1,500 words)

  6. I find the talk about Helicopter Money | Richard Duncan all a bit meaningless. Political leaders and central bankers round the world have done everything they can to prop up failed lending institutions, and lending that was imprudent from the start. We will not have a proper self sustaining recovery without an end to deficit spending and lots of financial institutions going bust. I find discussion about mortgage finance and home loans a bit meaningless. I also think the house prices have to fall a lot even now. I mean why would you want to own a home in Spain or France? Isn’t it much more cost effective to rent? Regards, Thomas Shum

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