how the Fed could fix the economy, and why it hasn’t

Published on Dissident Voice, by Ellen Hodgson Brown, February 24, 2013.

Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn’t been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real “helicopter drop” that puts money into the pockets of consumers and businesses has not yet been tried. Why not?  Another good question

When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve.  He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.

It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of “bank credit” created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.

But if debt deflation is so easy to fix, then why have the Fed’s massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?

On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.

That is the technical answer, but the motive behind it may be something deeper …

An Asset Swap Is Not a Helicopter Drop:

As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there.  Except for the small amount of “vault cash” available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank … //

… (full long text).

Links:

Quantitative easing QE on en.wikipedia: … is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective.[1][2] A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to change money supply, in order to keep market interest rates at a specified target value …;

Toxic asset on en.wikipedia: … is a popular term for certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder. The term became common during the
Late-2000s financial crisis, in which they continue to play a major role …;

One Seed Revolution (English): SRI (System of Rice Intensification, pronounced shree) has been
getting favorable press (and pushback) lately, so I thought I’d look into it some. Basically, I’m inclined to think there’s something in it, just based on what farmers are saying. So SRI is a real sign of hope. Here’s an educational — well, OK, propaganda — video about SRI made in and for India. It’s got English subtitles, so just pretend you’re in an art house …;

System of Rice Intensification SRI on en.wikipedia: … was developed as a methodology aimed at increasing the yield of rice produced in irrigated farming without relying on purchased inputs. Its main elements were assembled in 1983 by the French Jesuit Father Henri de Laulanie in Madagascar after 20 years of observation and experimentation.[1] However, systematic evaluation and then dissemination of the system did not occur until some 10-20 years later. The productivity and merits of SRI have been debated between supporters and critics of the system since 2004, but the controversy has waned in recent years …;

Foreign powers send heavy weapons to ‘moderate’ Syrian rebels: report, on Russia Today RT, February 24, 201: Outside powers have reportedly supplied heavy weapons to ‘moderate’ Free Syrian Army fighters, The Washington Post reports. Allegedly the arms have been delivered to Syria to counterweight radical Islamists high-jacking the rebel movement. The armaments are said to include anti-tank weapons and recoilless rifles and are thought to be the first such heavy weapons have been supplied from outside since the uprising against President Assad started two years ago, the newspaper reports;

War On Terror Is The West’s New Religion: But all the crusading and invading simply plays into al-Qa’ida’s hands,  just ask the French – on The Independent, by Robert Fisk, Feb 24, 2013.

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