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you might notice this title is stolen from ben bernanke's famous helicopter speech.
quotes from bernanke's speech are at the bottom of this note. to summarize, he said that if need be the fed can buy not only tbills, but longer dated tbonds [putting a lid on long term interest rates], gse paper, commercial paper [indirectly via banks], and foreign gov't debt, as well as monetizing a tax cut which would be "essentially equivalent to Milton Friedman's famous 'helicopter drop' of money."
my recent comments on the peter schiff interview [see http://www.itulip.com/forums/showthr...=2955#post2955 ] led me to thinking of a different deflationary scenario. i had thought that if a deflationary scenario unfolded slowly, then the fed's interventions along the lines described by bernanke would indeed produce inflation instead. [see the discussion http://www.itulip.com/forums/showthread.php?t=417 ]
but we live in a global economy. schiff's scenario postulates a foreign pick-up in consumption, even as overall global demand is reduced by a severe recession in the u.s. but china's economy is also at risk, not only because of its dependence on exports to the u.s., but also because of enormous mal-investments in both state-owned enterprises and in redundant fdi-based production capacity. thus a slowdown/recession in the u.s. risks triggering a chinese recession.
in this circumstance the fed's interventions will have to be sufficient to revive both the u.s. and chinese economies. or, more likely, the pboc will be engaging in similar stimulative actions, while the chinese gov't and the u.s. gov't both pursue fiscal stimulus. it seems to me that this would be a dicey matter of getting both the timing and the quantity of interventions right.
in this scenario the dollar might well strengthen, even in the face of u.s. economic weakness, and u.s. rates drop across the yield curve, because of global capital seeking the political and legal safety of u.s. markets.
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from bernanke's famous speech, available at:
http://www.federalreserve.gov/boardD...21/default.htm
Quote:
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and
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and the famous "helicopter" passage, making it clear that bernanke did not coin the concept
quotes from bernanke's speech are at the bottom of this note. to summarize, he said that if need be the fed can buy not only tbills, but longer dated tbonds [putting a lid on long term interest rates], gse paper, commercial paper [indirectly via banks], and foreign gov't debt, as well as monetizing a tax cut which would be "essentially equivalent to Milton Friedman's famous 'helicopter drop' of money."
my recent comments on the peter schiff interview [see http://www.itulip.com/forums/showthr...=2955#post2955 ] led me to thinking of a different deflationary scenario. i had thought that if a deflationary scenario unfolded slowly, then the fed's interventions along the lines described by bernanke would indeed produce inflation instead. [see the discussion http://www.itulip.com/forums/showthread.php?t=417 ]
but we live in a global economy. schiff's scenario postulates a foreign pick-up in consumption, even as overall global demand is reduced by a severe recession in the u.s. but china's economy is also at risk, not only because of its dependence on exports to the u.s., but also because of enormous mal-investments in both state-owned enterprises and in redundant fdi-based production capacity. thus a slowdown/recession in the u.s. risks triggering a chinese recession.
in this circumstance the fed's interventions will have to be sufficient to revive both the u.s. and chinese economies. or, more likely, the pboc will be engaging in similar stimulative actions, while the chinese gov't and the u.s. gov't both pursue fiscal stimulus. it seems to me that this would be a dicey matter of getting both the timing and the quantity of interventions right.
in this scenario the dollar might well strengthen, even in the face of u.s. economic weakness, and u.s. rates drop across the yield curve, because of global capital seeking the political and legal safety of u.s. markets.
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from bernanke's famous speech, available at:
http://www.federalreserve.gov/boardD...21/default.htm
Quote:
| So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well. Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association). |
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| To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15 The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16 |
and
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| Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation. |
and the famous "helicopter" passage, making it clear that bernanke did not coin the concept
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18
You guys aren't really so lazy. You run the worlds multinationals, and I think he's missing out on that fact. Your advanced capitalistic system is pretty much running the world in a lot of ways. True, joe six pack has probably been shopping a little too much lately and is in for a world of pain, but the US is still a great country.
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