Negative interest rates are causing some consternation as banks come to terms with the bad news. Still with the global economy flailing policy makers are at a loss so queue renewed talk of helicopter money.

As Gilbert highlights in the column below the big question Milton Friedman, money policy kingpin, was attempting to resolve "How much money would a perfectly balanced economy have in circulation to guarantee a community's ability to buy goods and services?" Or, we would add, directly employ every willing and able person for public benefit instead?

Since money policy is becoming so unhinged why not lean on the demand inducing levers of fiscal, government spending in the same manner that central bankers are with money policy?

Nobel Prize winning Titan of modern economics Paul Samuelson has an idea:

“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say ‘uh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.”

Well if Samuelson were alive today, dare we say Friedman too, they would have reason enough to declare money policy insufficient and resolve to utilise public money as the most efficient mechanism to regain economic traction by long term investment in public goods like education, technology, and resource efficiency.

Until then let's waste our time talking about "Helicopter Money"!

Milton Friedman's 'Helicopter Money' Is Looking Less Crazy
By Mark Gilbert

Increasingly, central bankers, economists and market watchers are discussing the pros and cons of what's called helicopter money, a 47-year old idea that posits a way to kickstart an economy through dropping money on its citizens. Peter Praet of the European Central Bank, for example, said in an interview published last week that "all central banks can do it" if needed; his ECB colleague Jens Weidmann warned that such a move "would rip huge holes in central bank balance sheets." Helicopter money feels very much like an idea whose time may be coming.

Quantitative Easing

Given all the interest, it's worth asking whether Milton Friedman, who came up with the concept, would support or oppose such an unorthodox policy if he were writing today. Friedman's 1969 essay on "The Optimum Quantity of Money" runs to 50 pages and opens a book that's almost 300 pages long and contains 13 articles.
Friedman's thought experiment is designed to answer the question hinted at in the title: How much money would a perfectly balanced economy have in circulation to guarantee a community's ability to buy goods and services? He includes the important proviso that the money drop is a one-time, never-to-be-repeated event:
In the absence of that assumption, the appearance of the helicopter might increase the degree of uncertainty anticipated by members of the community, which, in turn, might change the demand for real cash balances.
His one-off proviso suggests he might oppose putting his idea into practice. The existing unconventional policy known as quantitative easing started with the Federal Reserve buying $1.75 trillion of bonds in 2009; it followed with $600 billion more in 2010, and by 2012 it had shifted to an open-ended program at $85 billion per month -- which was slimmed down from December 2013 but didn't end until October 2014. The QE narrative suggests that the temptation to follow a first helicopter drop would be all but irresistible.
Friedman's essay doesn't just cover how helicopter money would work in practice; he also examines the reverse proposition of how a "furnace" might influence financial behavior:
Let us introduce a government which imposes a tax on all individuals and burns up the proceeds, engaging in no other functions. Let the tax be altered continuously to yield an amount that will produce a steady decline in the quantity of money at the rate of, say, 10 percent a year.
That strikes me as mirroring the way euro zone governments have failed to take advantage of the ECB's relaxed monetary regime, squandering money on social expenditure instead of making productive investments. As Bloomberg View contributor Jean-Michel Paul pointed out in November, infrastructure investment in countries including France and Italy has plummeted in recent years, while spending on pensions and healthcare has climbed.
One argument for helicopter money that might find favor with Friedman, at least in Europe, is the accusation that the ECB is almost out of ammunition, and that its recent expansion of QE yields diminishing returns. In a separate essay on "The Role of Monetary Policy," Friedman compared what was happening in the 1970s to the 1920s, in an essay that chimes with where we are now:
I fear that, now as then, the pendulum may well have swung too far, that, now as then, we are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve and, as a result, in danger of preventing it for making the contributions that it is capable of making.
Friedman's words presage the complaint central bankers make today, that there's only so much monetary policy can do to revive animal spirits in the absence of a fiscal boost from governments. Previously unorthodox policies are increasingly the norm -- the Fed's James Bullard used a speech in Frankfurt last week to discuss the argument that low interest rates fuel slower, not faster, inflation, while the claim of Modern Money Theory that governments shouldn't be afraid of deficit spending is gaining traction with some of the smartest people in the financial room.  
Friedman describes money as "an extraordinarily efficient machine," akin to tractors and factories in making the economy more efficient and productive. He also notes, however, that it has more potential to wreak havoc:
But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines.
Zero or negative interest rates are failing to stir consumer prices, while the Fed's attempt to normalize monetary policy looks likely to backfire embarrassingly. Because the money-machine isn't doing what the rule book suggests it should, the engines of economic growth continue to splutter and misfire. So the argument that might in the end have the most appeal for Friedman is the one that, intellectually at least, appears to be the weakest: If everything else is failing, why not try helicopter money?

Whether it be amendments to balance the budget, auditing central banks or returning to the gold standard the right is wrong on the important question of money in the economy.

Crazy About Money
by Paul Krugman
Commentary, NY Times:

In this year of Trump, the land is loud with the wails of political commentators ... crying out, “How can this be happening?” But a few brave souls are willing to whisper the awful truth: Many voters support Donald Trump because they actually agree with his ideas.
This is not, however, a column about Mr. Trump. It is, instead, about Ted Cruz, who has emerged as the favored candidate of the G.O.P. elite...
In a way, that’s quite a remarkable development. For Mr. Cruz has staked out positions on crucial issues that are, not to put too fine a point on it, crazy. How can elite Republicans back him?
The answer is the same for Mr. Cruz and the elite as it is for Mr. Trump and the base: Leading Republicans support Mr. Cruz, not despite his policy positions, but because of them. ... Establishment Republicans may wince at the candidate’s fondness for talking about “carpet bombing” or his choice of a noted anti-Muslim bigot and conspiracy theorist as an adviser.
But both Jeb Bush and Marco Rubio chose foreign policy teams dominated by the very people who pushed America into the Iraq debacle, and learned nothing from the experience. ...
And then there’s ... monetary policy. ... Mr. Cruz has staked out a distinctive position, by calling for a return to the gold standard. .... Mr. Cruz’s obsession with gold is one reason to believe that he would do even more economic damage in the White House than Mr. Trump...
Take, as a not at all arbitrary example, Paul Ryan,... the de facto leader of the Republican establishment ...Mr. Ryan is fundamentally a con man on his signature issue, fiscal policy. Incidentally, for what it’s worth, Mr. Cruz has been relatively honest by his party’s standards..., openly declaring his intention to raise taxes that hit the poor and the middle class even as he slashes them on the rich.
But Mr. Ryan seems to be a true believer on monetary policy... But what, exactly, is the nature of his monetary faith? The same as ... Mr. Cruz’s beliefs: Both men are devotees of Ayn Rand ...
The moral here is that we shouldn’t be surprised by the Republican establishment’s willingness to rally behind Mr. Cruz..., while his policy ideas are extreme, they reflect the same extremism that pervades the party’s elite.
There are no moderates, or for that matter, sensible people, anywhere in this story.

Efforts to make the a balanced budget legally binding are equivalent to our elected representatives disavowing responsibility for successfully managing fluctuations in the economy.

Stopping them from developing with the Functional Finance counter narrative and the weight of experts with access to the media and policy makers is important and something we hope to foster. 

Balanced Budget Amendment “Very Unsound Policy,” Leading Economists Warn:

A balanced budget amendment to the Constitution would be “very unsound policy” that would adversely affect the economy, a group of leading economists including four Nobel laureates explain in a letter today to President Obama and Congress, which the Economic Policy Institute and the Center on Budget and Policy Priorities spearheaded.  Several constitutional amendments requiring a balanced budget have been introduced in Congress, and the Senate Judiciary Committee is holding a hearing today on the issue.
“A balanced budget amendment would mandate perverse actions in the face of recessions,” the letter notes:
In economic downturns, tax revenues fall and some outlays, such as unemployment benefits, rise.  These built-in stabilizers increase the deficit but limit declines in after-tax income and purchasing power.  To keep the budget balanced every year would aggravate recessions.
A balanced budget amendment also would prevent federal borrowing to finance infrastructure, education, research and development, environmental protection, and other vital investments.  Adding arbitrary caps on federal spending — which some balanced budget proposals include — would make the amendment even more problematic, the letter says.
The signatories include Nobel laureates Peter Diamond, Eric Maskin, Christopher Sims, and Robert Solow as well as former Federal Reserve vice chair Alan Blinder and Social Security Advisory Board chair Henry J. Aaron.
The letter concludes:
A constitutional amendment is not needed to balance the budget.  The budget not only attained balance, but actually recorded surpluses and reduced debt, for four consecutive years after Congress enacted budget plans in the 1990s that reduced spending growth and raised revenues.  This was done under the existing Constitution, and it can be done again.  No other major nation hobbles its economy with a balanced budget mandate.  There is no need to put the nation in an economic straitjacket.  Let the President and Congress make fiscal policies in response to national needs and priorities as the authors of our Constitution wisely provided.

Click here for the full text.

Brad DeLong's contributing to the Huffington Post in a column called "Future Economists Will Probably Call This Decade the 'Longest Depression"' highlights our purpose at Functional Finance, Primarily, the need for an economic reeducation to combat the continued below trend growth starting with our elected representatives.

He writes:

"Unless something big and constructive in the way of global economic policy is done soon....Future economic historians may not call the period that began in 2007 the "Greatest Depression." But as of now, it is highly and increasingly probable that they will call it the "Longest Depression."

So what can be done?

The first task will be one of education. We will be unable to reliably adopt good policies and unable to sustain them (if we do by accident adopt them) unless we understand our situation. Thus everybody needs to read, think about and teach the lessons of two of the very best books of the past two years: Martin Wolf's "The Shifts and the Shocks" and Barry Eichengreen's "Hall of Mirrors."

The three-sentence elevator version of Eichengreen is: We remembered barely enough of the lessons of the Great Depression to avoid its recurrence. But then the fact that we did not have a Great Depression removed the spur that would have pushed us to relearn the lessons we had forgotten and to then apply them. Thus we are now trapped in Stiglitz's Great Malaise.

The three-sentence elevator version of Wolf is: Stability begat complacency, complacency begat carelessness and hence fragility and fragility set the stage for crisis.

What we need now is debt relief and much tighter financial regulation.

What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.

The second task will be one of political organization. For until politicians, finance ministry technocrats and central bankers feel under pressure to respond to and in fact internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others, our problems will remain, as Stiglitz puts it, "not rooted in economics, but in politics and ideology."

And it is only after those ideological and political blockages have been removed that the tasks of economic policy -- and then of shifting policy to deal with the new problems that arise as consequences of fixing our current economic policies -- can be seriously begun."

The disparity in income and accumulated wealth between what has become known as the 1% and the rest of the population has rightly become an important political issue. Inequality has become shorthand for fears about the political clout money affords those who can buy elected representatives at the expense of the popular will.  While the concentration of wealth raises concerns about the fragmenting fabric of society and declining prospects for the American Dream due to generational wealth and the advantages therein. In terms of the economic system, disparity in the distribution of incomes has a negative effect on demand that policy makers would do well to act on to support the public interest.

Mohamed El Erian in an interview with LinkedIn makes the point that high incomes lead to high savings leading to lower demand in the overall economy resulting from less money circulation. In economic speak, their propensity to spend declines after a certain level and goes unspent into the economy. Because there is a, relatively, set amount of money in the system failure to spend reduces demand and overall output.

El Erian writes:

"In the last few years, the global economy has evolved in ways once deemed highly unlikely, if not unthinkable. It is a phenomenon that continues today and will intensify in the period ahead.
 The global financial crisis that shook virtually every country, government, and household in the world in 2008–09 gave way to a frustrating “new normal” of low growth, rising inequality, political dysfunction, and, in some cases, social tensions—all despite massive policy interventions on the part of central banks and transformational technological innovations.Now this new normal is getting increasingly exhausted. For those caring to look, signs of stress are multiplying—so much so that the path the global economy is on is likely to end soon, and potentially quite suddenly.
As we approach this historic inflection point, unthinkables will become more common and insecurities will rise, especially as it becomes clearer that, rather than transition smoothly and automatically, the current path could give way to one of two very different new roads. The first promises higher inclusive growth and genuine financial stability. But, in stark contrast, the second would see us mired in even lower growth, periodic recessions, and the return of financial instability."
His analysis that central banks have done what they can and now must "hand off" to the fiscal authorities is important from such a prominent voice in finance

The Canadian Broadcasting Corporation recently produced a two part radio series titled The Illusion of Money. The introduction reads:

"We think we know what money is. We use it every day and our lives are unimaginable without it.  But look more closely and you find that coins and dollar bills aren't "real". They're promises, symbols, ideas.  And exactly what money is has evolved enormously over the ages. IDEAS contributor Anik See explores how we're rethinking one of the most basic features of human society."

Befitting the title, the series does well to question our understanding of money and assumptions about the construct it provides with many good contributors with insightful remarks for example Joris Luyendijk comments that "Money is something we no longer understand. Because it describes a claim on future goods and services, but it's also a store of value, it's used as a productive resource. It's all sorts of different things. And I think it's terrifying because if our economy is the body, then money is the blood and the financial sector is the heart. And if we no longer understand the blood that's keeping our body alive, we're in deep trouble." 

Part 1 is a broad and thought provoking discussion while Part 2 concerns the evolution of currency, developments  in crypto currency like Bitcoin and examples of local currency movements. Local currencies have done well to shine a light on the multiplying effect of circulating money within a local economy and the benefits there in. Similarly, Bitcoins potential for increased efficiency and lower transaction costs are significant benefits. For those concerned with breaking the traditional banking sectors stranglehold on processing transactions both provide genuine solutions.   

However, they suffer from the major limitation as not being state money and as  such not serviceable as payment for taxes or other public obligations nationally. That's ok and we should resist or at the least be skeptical of efforts to extend this right outside of the state sanctioned debt and private banking,

In the centuries since the Bank of England was founded in 1694, money and private banking has evolved and while still clearly not perfect adding potentially more complications to the system does not necessary benefit society. Our advocacy in the first instance is for a broader, better understanding of the current system which this series provides in part. Only once citizens recognize the reality of modern fiat money creation, circulation and destruction will we be able to progress effectively away from what is best described as capitalism based on the centrality of private bank management of money in the economy.

Following from that we will no longer be obligated to private institutions for management of the money supply and begin to utilize the benefits of modern money for the public interest.