Eurointelligence: At last, a deal on the Irish promissory notes (08.02.2013)

Wolf and Kaletsky on the monetary financing of deficits

Martin Wolf and Anatol Kaletsky both picked up on a speech by Adair Turner, in which he openly advocated monetary financing of debt. QE and other forms of non-conventional policies had not brought the desired benefits, and it was now time for the biggest of all bazookas.

Martin Wolf picks up on the debate about nominal GDP targeting, and calls for an official re-assessment of the current inflation targeting regime, which he says is failing in the current environment.

I agree with Lord Turner that the even more important question is how to make any policy effective. This, inevitably, raises questions about how monetary policy works in an environment of ultra-low interest rates. Lord Turner thinks the unthinkable: namely, monetary financing of the fiscal deficit. So should policy makers. They have to think afresh. If not now, when?

Anatole Kaletsky recalls that Keynes and the Monetarist agreed on the notion that in dire circumstance the central bank should create money. Keynes advocated money to be deposit in coal mines, for workers to extract it. The monetarists chose the then high-tech variety of a helicopter drop. This is how Kaletsky would do it:

Consider the U.S. Federal Reserve. At present the Fed prints $85 billion of new money monthly and distributes it to banks and Wall Street investors by buying government bonds. And the Fed has promised to continue this monthly "quantitative easing" until such time as unemployment drops and is clearly and sustainably declining to more normal levels. Now suppose instead that the Fed divided its $85 billion monthly money production into 300 million checks of $283 each and sent these to every man, woman and child in America. Suppose, moreover, that the Fed promised to keep sending out these checks, worth more than $1,000 a month for a four-person household, until the United States reached its unemployment target - and the Fed chairman added that he would increase the checks to $1,500 or $2,000 a month for that household if $1,000 monthly proved insufficient. There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment - and no doubt that it would be infinitely more effective than distributing money to bond investors and banks through QE.