For those who don't want to increase government spending...

on things like extending unemployment benifits, jobs programs, and sending states money to help plug budget holes... here's another option to ponder!

 

Why the Federal Reserve should LITERALLY throw money out of helicopters 

The situation has a name in the economic jargon - a liquidity trap.  An American – not a Japanese version of a liquidity trap – but a liquidity trap nonetheless.  No matter how much “money” the Fed supplies the public will want to hold it.  Monetary policy is thus useless.  

This is usually made out (by Krugman et al) as an excuse for massive fiscal policy.  And I am not averse to that.  

However there is another approach which I detailed in my lessons from shorting JGBs post.  The argument: if you can’t fix the problem with increasing money supply then maybe you can fix the problem with decreasing money demand.  

You need to convince people not to hold money.  You need to convince them that cash is trash.

And to do that you need to convince the public that there will be inflation (the above gross leverage argument notwithstanding).  

To do that the Federal Reserve has to be credibly irresponsible.  It is not enough to print a couple of trillion dollars (which they have) because everyone thinks (with some justification) that they will suck back the money supply when the crisis is over.

No – you have to be more visibly reckless than that.  You have to really convince people that there will be inflation.  

So the suggestion in my title is literal.  The Federal Reserve should hire a couple of hundred helicopters and load each one 10 million dollars in neatly bound parcels of $1000 each.  Total cost $2 billion plus trivial helicopter hire.

It should fly them over 200 randomly picked American cities and throw the money out the window.  It should press release this – but press coverage will be excessive.  Indeed I suspect that the press coverage would give the Fed’s inflation policy greater awareness than the Coca Cola Company.  (The Coca Cola Company’s annual advertising budget is $2.8 billion – so this is already cheap compared to some private sector alternatives.)  

The press release should be simple.  We are doing this to induce inflation.  If there is no inflation as a result we will simply do it again. 

Of course people will fall of roofs after searching for money that might have landed on their house.  They might die.  Of course people might get trampled in the crush.  They might die too.  

All of this increases the visible recklessness of the policy.

But the charm of this.  It may actually induce mass spending of American dollars for (self-fulfilling fear of inflation)– a massive stimulus.  And it will do it all for $2 billon.  Obama has a stimulus package of $1.2 trillion – or about 600 times as large.  This is relatively cheap.

The real case for throwing money out of helicopters is that it looks like it will work better than anything else that anyone has come up with yet.

And it will be cheap.  Much cheaper than alternatives that are actually being implemented.

The secondary benefit is that most of the losses from inflation will be in the hands of the Chinese who have built huge reserves of soon-to-be-deflated US dollars.  

Hey what better – lets kick start the economy and get the Chinese to pay.

I am serious.  At least serious until I can get a credible explanation as to why this won't work at least as well as any of the alternatives being mooted.

 

 

 

 

Posted via email from Jim Nichols