Japan: The Way Out

helicopter money, Japan, liquidity trap, negative interest rates, Keynes
"Money from Heaven," image from GIF embedded in the post. Original video here http://www.shutterstock.com/video/clip-2645099-stock-footage-money-from-heaven-jpy-loop-japanese-yen-bills-falling-from-sky-seamless-loop-slight.html?src=download-history/0/3p

"Helicopter money" started out as, and long remained, nothing more than a heuristic device — and a brazenly counterfactual one at that — employed by monetary economists as a means for gaining a better theoretical understanding of the consequences of changes in the stock of money.  "Suppose," the analysis went, that instead of increasing the monetary base by buying bonds in the open market, central banks dropped new supplies of currency from helicopters, thereby instantly increasing everyone's money balances.  What would that do to spending and, eventually, to prices?

Lately, however, helicopter money has made its way from the inner recesses of economics textbooks to the financial pages of major newspapers and magazines, where a debate has been joined concerning its merits, not as an abstract analytical tool, but as an actual policy tool for relieving Japan, and perhaps some other economies, of their deflationary woes.  Look, for some examples, here, here, and here.  And see as well this recent blog post by our dear friend Jerry Jordan, written for the Atlas Foundation's Sound Money Project.

Yet for all the controversy surrounding the suggestion that Japan should actually try dropping money from helicopters (or something close to that), my own response to it consisted, not of either surprise or dismay, but of a strong sense of déja vu.  For I myself wrote an op-ed proposing helicopter money for Japan in the spring of 1997, that is, almost exactly 19 years ago.  I never tried to publish it, in part because I myself couldn't quite decide just how firmly my tongue was poking my cheek as I wrote it, and because I had then as I do still an abiding dislike of  "clevernomics," which is the sort of stuff economists write to show people how smart they are, and not because they are seriously trying to help the world along.  Fearing that I was myself lapsing into clevernomics, I stuffed the essay into a file cabinet, where it has been buried ever since.

All the recent writing on the subject has, however, emboldened me to resurrect my dusty old essay and to publish it here on Alt-M under its original title.  I don't pretend that it adds anything to what recent commentators have had to say on the topic.  Consider it a bagatelle, if you like: you'll get no argument from me.


They said it was like "pushing on a string."  It was the middle of the 1930s, and the U.S. and much of the rest of the world were in the midst of an unparalleled deflationary crisis.  Normally the way out of such a crisis would have been for central banks, including the Federal Reserve, to inject more reserves into their banking systems by buying securities in the open market and paying for them with central bank credits.  That policy would do provided banks put the new reserves to work by lending them out, thereby stimulating an increase in demand for investment or consumer goods.  But in the U.S. interest rates on loans and securities had fallen so low, the Fed claimed, that adding to bank reserves no longer helped: the new reserves “pushed” into commercial banks would simply pile-up there, instead of causing the banks to extend more private credit.  Hence, “pushing on a string.”  Economists, following John Maynard Keynes, referred to the conundrum in question as a "liquidity trap."

Whether the U.S. economy was really stuck in a liquidity trap during the Great Depression remains controversial.  For several decades afterwards, however, the issue was moot, as inflation replaced deflation throughout the world's economies.  Only recently it has again taken on practical significance, with economists and Japanese monetary authorities pointing to Japan today as another instance of an economy faced with an insatiable demand for liquidity.  Japanese consumer and producer spending has been shrinking for months, causing wholesale prices to decline and inventories to accumulate.  The overnight call loan rate has hit zero, and short-term lending rates are at historically low levels.  Although the Bank of Japan has been pumping reserves into the banking system, bank lending remains sluggish.  The banks have more reserves than ever, but seem to lack any incentive for putting them to use.

Japan's dilemma has at least one Federal Reserve official worried that the same thing might happen again (or, as some would have it, for the first time) in the United States.  Marvin Goodfriend, a Vice-President of the Richmond Fed, proposes in a recent paper that, in the event that we should fall into a liquidity trap, Congress should grant the Fed authority to tax bank reserves, causing them, in effect, to earn a negative return.  Since even a zero interest rate on loans beats a negative return on reserves, the banks would have reason to lend even at zero rates.  For good measure, Goodfriend recommends that public currency holdings be taxed as well, so as to discourage hoarding by the public.

Goodfriend's proposed taxes are meant to be emergency measures only, which would be removed in good times.  Still, one shudders to think what might happen should the government decide to take advantage of the new measures' capacity for enhancing its share of the profits from the Fed's money monopoly.

Fortunately, central banks don't need new taxing powers to free their economies from liquidity traps.  All they need to do is to supply new money directly to the public, instead of trying to get it to them indirectly by first adding it to bank reserves.  Individual citizens, unlike commercial banks and other financial firms, do not have to decide either to hoard money or to lend it at some trivial rate of interest.  They have a third, more tempting, option, namely, that of spending unwanted money balances directly on goods and services.  Central banks, on the other hand, don't have to issue new money in exchange for securities or collateral owned by private financial firms: they can simply give it away to citizens, avoiding the middlemen.

In Japan today, the strategy could work as follows: the Bank of Japan could announce its intention of giving away, say Y5000 (roughly $50 U.S.) to every Japanese citizen each month until private spending picks up, bringing Japan's deflationary crisis to an end.  The giveaway could be engineered in a manner similar to that employed during the 1990 German monetary unification, when the Bundesbank supplied East German citizens with limited quantities of Deutsche marks in exchange for Ostmarks.  The policy would assure Japan's citizen's that, one way or another, their money earnings were about to permanently increase, giving them ample reason to consume more.  Given Japan's population, the promised rate of new money creation would increase Japan's monetary base by around ten percent after a year — a substantial rate, but not large compared to recent annual figures.  Moreover, the mere announcement of the policy might suffice to revive spending quickly, allowing the policy to expire in relatively short order.

Critics of the monetary giveaway proposed here might fear that it would ultimately trigger inflation.  The same sort of thinking led the Federal Reserve, in the mid 1930s, to actually raise bank reserve requirements out of fear that banks might change their minds any minute and begin lending their hoards of cash.  The Fed's fears turned out to be exaggerated, to put it charitably: its decision actually helped to keep the U.S. depression going for several more years.  Of course, if spending had actually revived on its own, surpassing the level necessary to revive the economy, the Fed could have dealt with the "problem" easily enough, by reabsorbing excess money by means of bond sales.

Keynes had a good quip about Fed officials who worried, in 1936, about inflation: they “professed to fear that for which they dared not hope.”  Let's hope that the Bank of Japan won't harbor such misplaced fears, and that it doesn't otherwise allow the liquidity-trap bogey to keep it from doing all it can to revive Japan's economy.


  1. So, George, you are promoting the use of "helicopter money" (which is now being referred to as a "Universal Basic Income", or UBI)? Universal in the sense that it is not just the poor and down and out that get money, everyone does – which, again, appears to be what you are proposing.

    BTW, finished your book, "The Theory of Free Banking…", this weekend. Would love to see your vision become a reality.

    1. Thank you for your kind remarks about TFB.

      As for UBI, well, I wrote in favor of something like it in '97 but, as I note, I never published the piece until now, and publish it here only for kicks. As I recall, I was really more interested in arguing that it is always possible for monetary authorities to boost spending by means of money creation. I am far from convinced, nonetheless, that doing so by means of helicopter drops is a good idea.

  2. Can't they just abolish the central bank monopoly in issuing currency, and by that create the fundament for competing currencies? I can't see how this would not cause the YEN to get a strong devaluation against commodities, which would cause YEN denominated debt to be worth far less in real terms. It will of course be trashed and that would be a disaster for people with savings and no hedge against a YEN devaluation. From what I can see this will be a big one time inflation which will be exchanged by more stable money once the market has gone over to other more stable currencies?

  3. George, I seem to remember a post on the old blog where you gave a list of books to read before reading TFB. However, I cannot seem to find that post now. Maybe my memory is just faulty though.

    1. Not a Banker, I can't remember it either. But perhaps I'll write a new one. (And pardon this late reply–I managed to miss your comment until now.)

      1. No need to apologize. I appreciate what you do a great deal. It's just I would at some point like to read it, but I figure there are too many gaps in my knowledge to fully appreciate it as of now.

  4. George way to go! You said: "Central banks, on the other hand, don't have to issue new money in
    exchange for securities or collateral owned by private financial firms:
    they can simply give it away to citizens, avoiding the middlemen."

    I wrote about this correct view on Talkmarkets. It is promoted primarily by Eric Lonergan. Thanks that someone else actually understands it. I just wrote that Bill Gross doesn't. He still looks at it in terms of QE.

  5. Oh please, Hardmoney jim. What about the moral hazard of bailing the banks out, of the government going into massive debt to do so. And yet the Fed cannot do one thing for main street that would get us off the zero bound? Are you serious? Only the people who think that helicopter money is a form of QE, with bonds being taken out of circulation, are the people who are most concerned it won't work. Of course it would work. There is no bond exchange to the Fed at all. And it would be fair. But the Fed will run our nation into negative interest ground before it does the right thing and issues helicopter money. You watch. I hope I am wrong about the Fed. But I don't think I am.

    Bottom line, helicopter money is not QE. It is far better than QE. And it will get us out of the negative spiral we are in. Japan needs to do it and the Eurozone too. As it is, the Eurozone is buying sovereign bonds already in short supply and that drives yield lower and lower in the face of massive demand with new collateral rules.

  6. Selgin's solution is better than QE and such, but still it's a short term solution and won't address the problems that arise from central banking with fiat currencies.

  7. Thanks for the response, Hardmoney. I don't think faith in money would be destroyed by helicopter money. When people borrow and massive deposits are created like in the housing bubble, nobody thinks that faith in money was threatened. So, if people don't want to borrow, giving them base money won't change that faith in money. If anything, bankers make their living on debt. Bypassing debt by the use of helicopter money could rub them the wrong way but it shouldn't.

  8. The proposal would almost certainly work and be popular. If the increased demand for money turned out out be temporary though the additional taxes needed to hoover the money back up again may be less popular.

  9. Monetary economics is perhaps the most “eely” subject on Earth. It is very difficult to catch hold of that grand eel MONEY, which is what makes that study fascinating, but frustrating as well. If I understood Prof. Selgin’s arguments correctly the fear of inflation is based on the assumption that prices of consumables will go up as much as real estate and luxury assets, if people earn more or more money is in circulation if banks start releasing loans possibly at moderate to low interest rates where the Central Bank will also play a regulatory role. But then the quantity of consumption /purchase of products will remain the same, if the prices of products commensurately rise. So where then is the economic growth, meaning industrial and agricultural output increase, if prices block it? This may be considered a simplistic common sense view or “fear”. But that’s what guides the common man. Interestingly, Japanese are generally considered as “miserly” as the proverbial Scots, counting and preserving each and every Yen they earn or use, thus in the overall performance following a consolidation economics which Germany under conservative governments was used to too.

    George Chakko, Vienna, Austria 07/05/2016 19:51 hrs

    1. Well, this common man understands that savings in Japan has diminished greatly. Check it out. So, if that is the case, perhaps the Japanese would spend base money issued by the BOJ, which is really a timid group of cowards. Central banking is filled with cowards if it doesn't implement, sparingly, helicopter money in a negative rate environment. If you save the banks and destroy the nation what have you gained? Japan is an export nation. It needs to buy more stuff. Common man 5/7/2016 7:15 PM PDT.

      1. It is difficult to get a clear insight into the Japanese investment psychology or habits of the financial culture in individuals, homes and normal citizens there as a whole. In general the U.S. is a spending culture that goes well along with its pioneer spirit in risk-taking for new innovative ideas. It looks as though in Japan only the Big Corps can afford or are habituated for R&D investment as a matter of principle to survive. I wouldn’t want to risk saying, if BoJ disburses extra cash bonus for each citizen, it would be spent immediately all over to drive visible industrial growth. For all I know the recipient would save it, keeping it safe for another 2 years and even more and spend it on a foreign travel, a real estate buy or something else. We will never know. Only a common Japanese citizen living in Japan can tell us what he or she will do with the new pocket infusion if given today. I don’t think there are statistical surveys on this. My simple theory still is, the best way to get the best of your money is to invest it as early as you can, if not immediately. Hoarding money is not in my genes.

        G. Chakko, Vienna 08/05/2016 11:09 hrs

  10. Interesting read. But check this out:


    The post on Lord Turner, which is about Japan, and how helicopter money (fiscal outlays financed by central bank printing) worked in the exotic island nation.

    You know, there may be more than one way to skin a cat. But starving a cat is not one of them.

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