E Fed Tricksters, Put Your Monetarism Where Your Mouths Are

The New Monetarists have brought the economy a little way back from the abyss, after they liquidated it with procyclical policies, but neoliberalism has made the poor, poorer, along with globalization and automation. Dropping interest rates actually does not affect these households much when asset prices rise. They generally get a raise by moving in with relatives, not by taking advantage of low borrowing rates.

Low rates cease to be a stimulus. And low nominal rates may even be too high already since growth has crawled to a halt. But going negative can be hazardous if it doesn't work and if there is a big downturn. Real rates are probably severely negative right now. We must consider Friedman at this critical time of Fed paralysis.

But the father of modern monetarism, Milton Friedman, had one trick left in his magic hat. That trick was pure helicopter money. Once the other tools of the Fed, like bringing interest rates lower to stimulate growth or by using asset purchases to stabilize prices, become less effective, the only real tool to make the society prosper is helicopter money. Friedman was not a street corner slight of hand lightweight like Janet Yellen. No, he was a big time magician.

Helicopter money should be distinguished 1. from guaranteed income, otherwise known as Universal Basic Income (UBI), promoted by Charles Murray, 2. from fiscally based QE, 3. from Keynesian deficit spending stimulus.

Milton Friedman did advocate a negative income tax, and helicopter money, but they two different things. Unlike helicopter money, UBI is financed through taxation. That could present a problem, making those who pay taxes more likely to cheat than if there was no UBI. Also, tax cuts promised by politicians could establish a massive deficit if we try UBI, which needs more taxation. And while we do have a negative income tax that is not universal, it is not as far reaching as is a universal and continual grant of money to all the people.

As for UBI, perhaps the economy could one day generate enough real wealth to allow a universal UBI, but I am uncomfortable with going beyond Friedman's negative income tax for the needy.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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