Ben Bernanke, Martin Wolf and Austin Mitchell MP
Ben Bernanke, now chairman of the US Federal Reserve, when discussing inflation years ago said: “If we do fall into deflation we can take comfort that the logic of the printing press will assert itself and a sufficient injection of money will ultimately always reverse a deflation”. He was referring to Milton Friedman’s proposal, that in such an emergency the Fed could drop dollar notes from helicopters to revive effective demand.
2008 Attwood Award winner MP Austin Mitchell has wiser proposals. His early day motions on the subject urge government to spend public money on meeting unfulfilled public needs: financing hospitals and investment in environmental technology which will reduce greenhouse gas emissions.
Thomas Attwood – Birmingham’s first MP – would have seen the social, environmental and economic merits of this strategy.
Martin Wolf wrote in the Financial Times,“The legacy of the 2008 crisis has included a wide range of experiments, of which QE is one. QE involves the creation of central bank money on a large scale. That makes it ‘quantitative’ “.
He describes the charge that QE must lead to hyperinflation or at least high inflation – made for many years by conventional economists and Treasury personnel (extract below) – as a wild, ‘albeit popular’, criticism.
Wolf continues: “QE is an extreme version of traditional open-market operations of central banks. So it does increase banks’ reserves. Yet no mechanical link exists between reserves and lending in a modern banking system. Institutions know the central bank will provide them with the money they need, to provide customers with cash or settle with other banks, so long as they stay solvent. The determinant of bank lending and so their creation of money is their perception of the risks and rewards of lending, not the size of their reserves”.
He adds, however, that , done on a suitably large scale, helicopter money would, as Willem Buiter, chief economist of Citi, argues, end deficient demand. In irresponsible hands it could also cause hyperinflation. But it need not do so.
The fiat base money analyzed in this paper can be produced at zero marginal cost by the State (much like paper currency or bank reserves with the Central Bank in the real world), as a funding instrument for the State.