The Ultima Ratio Of Central Banking Socialism

Social Engineers Pleading for Helicopter Money

Apparently the mainstream government propaganda organs are on a mission to spread the worst economic ideas possible, so as to bring down what little is left of the free market economy even faster. Recently they are employing an ages old trick: promise people they will get something for “free”.

The latest author to take up the baton is one aptly named Vincent Crook at Bloomberg (anyone who has followed the Bloomberg editorial line in recent years should by now be aware that it is an even worse socialistic and statist rag than the Financial Times. The latter at least allows opposing voices to have an occasional say).

Mr. Crook has graced us with a screed entitled: “ECB Should Fire Up Its Helicopters”.

The ECB’s magical money helicopter

Image via adamsmith.org / Author unknown

The ideas presented in this article are nothing new. Faced with the failure of the post 2008 money printing orgy to bring about any lasting economic improvement thus far – instead, only even bigger, arguably more dangerous asset bubbles have been blown – various economists have proposed that central banks should print yet more money, but instead of buying securities from troubled banks, they should simply send everyone a check (the aforementioned “for free” carrot, a.k.a. “helicopter money”). This is usually accompanied by an appeal to authority in the form of the late Milton Friedman who coined the term. Leave it to our modern-day social engineers to dig up the man’s very worst ideas and declare them holy writ.

We already discussed in some detail why the idea is appalling economic nonsense and would be extremely dangerous for Europe’s economy if it were actually implemented (see “A Flawed Analysis of What Ails the Economy” for details). Below are a few excerpts from Mr. Crook’s article with our comments interspersed. He starts out with the usual nonsensical pablum about the alleged “danger of deflation”:

“Last week, a senior ECB official said the central bank will wait until the beginning of next year before deciding whether to start buying government debt — that is, adopt quantitative easing in the style of the U.S. Federal Reserve. The ECB apparently still hopes that the small-bore measures it’s announced so far (purchases of private bonds and asset-backed securities) will deliver enough stimulus. That’s doubtful at best. Deflation in the euro area is a clear and present danger. More aggressive QE is needed, the sooner the better.

As we never tire to point out, deflation – which in the nowadays most widely used definition refers to falling prices of consumer goods – is not a “danger”. Falling consumer goods prices are in fact the very hallmark of a progressing economy. Increasing productivity lowers production costs and this is passed on to consumers. In “No, Deflation is Not a Danger”, we already discussed similar assertions about this imaginary danger made by ECB president Mario Draghi.

If you read Mr. Crook’s article, you will notice that he is not stopping to ponder whether his assertions about the “deflation danger” or the proposed cure, namely even more money printing, might require justification. We have noticed this frequently in mainstream articles on these and related subjects (such as “fiscal stimulus”): it is glibly assumed that it should be obvious to readers that assorted central planning mandarins and their apologists actually know what they are doing and saying.

The idea that money printing is “beneficial” evidently isn’t even up for debate anymore. Mr. Crook informs us that the ECB faces numerous obstacles in implementing various money printing plans – inter alia the not inconsiderable one that certain types of “QE” are simply illegal according to the central bank’s statutes. To this it should be noted that the part of the ECB’s statutes regulating the question of government financing by the central bank is slightly ambiguous. It reads as follows:

21.1. In accordance with Article 123 of the Treaty on the Functioning of the European Union, overdrafts or any other type of credit facility with the ECB or with the national central banks in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.”

The decisive term above is not “prohibited” as one might be inclined to assume, but the small word “directly”. This is essentially saying that while the ECB is not allowed to buy government debt in the primary markets and is prohibited from directly crediting government accounts (note to Mr. Crook: direct financing of governments by the ECB is not “maybe” illegal, it is most definitely and explicitly illegal), nothing can keep it from buying such debt from third parties. However, there is a faction in the ECB council that believes that it is the spirit of the law that is important, not its technicalities. Mr. Crook reminds us though that these doubters can be easily pushed aside:

“One of these obstacles — the split on the ECB’s policy-making council — really ought to pose no difficulty. The members most trenchantly opposed to more forceful action are a small minority.They can simply be voted down.”

He then lists a number of “better plans” – better that is, than those currently pursued by the in his opinion too meek ECB council, which he thinks isn’t inflating fast enough – all of which involve more money printing combined with some form of credit dirigisme. The old “infrastructure investment” horse is flogged again, as well as the idea that the ECB should actually buy US treasury bonds so as to drive the euro’s exchange value down – in other words, it should make Europe richer by impoverishing it. This is by the way another shibboleth that is never explained: readers are supposed to simply “know” that debasing one’s currency is a “good thing”. The Japanese can tell you all about that by now (real incomes in Japan have been in free-fall since Shinzo Abe’s delusional co-pilot Mr. Kuroda – h/t Bill Bonner – embarked on his currency war).

Euro area money M1 (=TMS), and its annual growth rate. Since 2008, the euro area’s money supply has increased by a cool 54%. Some deflation! Obviously, in the eyes of the Keynesian “intelligentsia” this does not show that money printing is a failure, it only shows that not enough of it has been done. Japan has been the land of “not enough” for almost a quarter of a century, and is sitting on the biggest pile of government debt in the developed world as a result – via ECB – click to enlarge..

Let’s Try Socialism

Having listed all sorts of inflationary plans (all of which are confusing money with wealth and are blithely ignoring how the economy actually works and all of which he approves of), Mr. Crook lets the cat out of the bag. According to him, Milton Friedman apparently would have supported something we could call full-blown central banking socialism:

“Taking that logic one step further, you have so-called helicopter money — named after Milton Friedman’s example of executing monetary stimulus by dropping cash from helicopters. Classically, in practical terms, this would again take the form of direct monetary financing: Governments cut taxes or increase their spending, and the ECB pays for it by printing money. That is presumably verboten. But Oxford University’s John Muellbauer suggests an interesting variant. What’s to stop the ECB from simply mailing out checks? QE for the people, he calls it:

“Of the roughly 275 million adults with social-security numbers in the eurozone, some 90 percent are on the electoral register. Extrapolating from America’s experience in 2001, when a $300 per person social-security rebate boosted spending by about 25 percent of the total amount distributed, a €500 ($640) check from the ECB could increase spending by about €34 billion, or 1.4% of GDP. The extra tax revenue that such a rebate would produce would reduce government deficits significantly. Beyond lifting the eurozone economy out of deflation, such an initiative would have massive political benefits, as it would reduce resentment toward European institutions, especially in struggling countries like Greece and Portugal, where an extra €500 would have a particularly strong impact on spending. In this way, the ECB could prove to disgruntled citizens and investors that it is serious about meeting its inflation target, and even help to stem the rise of nationalist parties.”

Nobody is saying that this would be uncontroversial. Jens Weidmann, the Bundesbank’s representative on the ECB governing council, would probably have a stroke. On the face of it, though, this approach would be legal. It would make Milton Friedman proud. Best of all, it’s a good idea. Fire up the helicopters!

We somehow doubt Milton Friedman would be “proud” of this so-called “solution”, but you never know. After all, his modern-day Chicago School followers have come full circle and are best described as “left-wing fringe” as we noted in a recent comment on Mr. Rogoff. Anyway, the above strikes us as a desperate gambit to imbue socialistic clap-trap with some sort of “free market imprimatur” by invoking Friedman. Friedman’s support of positivism in economics and his support of central banking were both misguided, but he was still a bit more free-market oriented than this armchair central planner is making him out to be.

As an aside to the above, those who insist on the study of empirical data in judging economic policies should perhaps explain why the only countries in the euro area showing a few signs of economic life lately are precisely the ones that have seen genuine deflation of their domestic money supply, have imposed a bit of fiscal austerity and have experienced both falling prices and falling wages. Shouldn’t they be the ones doing worst? The fact is however that they are currently the only countries in which an economic recovery is detectable (see the comparison of euro zone PMI data posted by Mish and take a look at Spain and Ireland).

As we have frequently pointed out, “spending” as such is not what makes the economy grow – this is simply putting the cart before the horse. Moreover, the composition of spending in the economy looks actually a lot different from what is widely assumed. The incessant appeals to boost consumption indicate to us that their supporters are not informed on this point. GDP data exclude all intermediary stages of production because that would allegedly amount to “double counting”, thus most people believe that “consumer spending represents 70% of economic activity”. This is patently not so. In reality, consumer spending at most amounts to between 35% to 40% of all spending in the economy. This can be ascertained by looking at gross national output accounts. They incidentally also show that the biggest sector of the economy in terms of gross output actually remains the manufacturing industry.

The comrades in London are protesting. Maybe it’s because they won’t get a check from the ECB?

Photo via redyouthuk.wordpress.com / Author unknown

On many alternative media sites a number of people commented on this veering off into outright central banking socialism by saying something along the lines of: “Wouldn’t it have been much better to simply mail all that central bank money to the people instead of giving it to bankers?”

It could well be argued that the usual redistributive effect of money printing would be mitigated at least tosome extent by mailing a check to everybody, but here is for instance one objection supporters of this idea never seem to be giving any thought:

What about all those who have been prudent and have saved and/or wisely invested their money? The value of their savings will be almost immediately impaired. Why should they be made to suffer in favor of imprudent spenders and debtors? Haven’t enough ignominies been visited on savers by now?

Apart from this however, it should be glaringly obvious that if everybody’s bank balance were magically increased by an ECB check, society as a whole would not become more prosperous at all – not by one iota in fact. Murray Rothbard calls this the “Angel Gabriel model” and explains the problem as follows (the Angel Gabriel takes on the role of the ECB in this example):

“To show why an increase in the money supply confers no social benefits, let us picture to ourselves what I call the “Angel Gabriel” model. The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money. In the morning, when we all wake up, we find that the amount of money we had in our wallets, purses, safes, and bank accounts has doubled.

What will be the reaction? Everyone knows it will be instant hoopla and joyous bewilderment. Every person will consider that he is now twice as well off, since his money stock has doubled. [E]veryone’s cash balance, and therefore total M [M=money supply, ed.], has doubled. Everyone rushes out to spend their new surplus cash balances. But, as they rush to spend the money, all that happens is that demand curves for all goods and services rise. Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all. And so prices will, overall, approximately double, and people will find that they are not really any better off than they were before. Their cash balances have doubled, but so have prices, and so their purchasing power remains the same. Because he knew no economics, the Angel Gabriel’s gift to mankind has turned to ashes.”

Rothbard simplifies a bit above with respect to the effect the money supply increase would have on prices – not all prices will double, and what happens in detail will depend on the spending patterns that emerge, i.e., some prices will rise more than others, and there may also be some additions to savings or debt repayments counteracting the price effects. The essential point remains though that “real resources, labor, capital, goods, natural resources, productivity, have not changed at all”.

The surge in spending, by influencing prices unevenly, will however affect the manner in which these real resources are deployed. Moreover, there can be little doubt that the market would adjust very quickly to the fact of an overnight increase in the money supply. The purchasing power of money would definitely decline noticeably, only who is most affected by this will depend on personal spending patterns (in this respect there is actually little difference between “traditional” monetary pumping and the “Angel Gabriel” intercession).

Undermining the Market Economy with Social Engineering

Dr. Richard Ebeling has recently written an article on F. A. Hayek’s work on the dispersion and nature of human knowledge, and his associated critique of “scientism” in economics (we highly recommend reading the article). The warning Hayek left us with in this context is very important and we will it repeat here (this was the conclusion to his Nobel Prize lecture on the “Pretense of Knowledge”):

“If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails [such as in the modern market economy], he cannot acquire the full knowledge which would make mastery of the events possible . . .

The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society — a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.”

Hayek also noted that employing monetary pumping to alleviate unemployment only ensures that as soon as the pumping is stopped, even worse unemployment will ensue. No sustainable employment can possibly be created by money printing. Essentially, ever bigger busts are baked into the cake. There is a tendency for those responsible to try to cover their behinds by blaming the market economy when these inevitable busts strike. Thus the policies that are allegedly designed to “support the market economy” and “protect us against (imaginary) market failures” only lead to its gradual destruction. In fact, the entire capitalistic economic order and with it political freedom are under severe threat by these policies.

We can already see this happening in Europe: the rise in electoral support for crypto-communist, mercantilist and national socialist parties in a number of countries is a direct consequence of the failures of central banking and the fiat money system. Contrary to Mr. Crook’s notion that political extremism would be held in check by additional money printing, it would only be given fresh tinder. Meanwhile, the social engineers and central planners who have produced this mess are completely clueless as to what they should do next. All indications so far are that they are prone to giving in to short term pressures and implementing even more policies that will end up undermining the market economy. The only exceptions are the places in which a de facto government bankruptcy has forced politicians to adopt some halfhearted reforms (this is better than no reforms at all, but it is all too little, too late and insufficient attention has been given to shrinking the State).

Conclusion:

The helicopters should better stay grounded.