Time for the Nuclear Option: Raining Money on Main Street

Predictions are that we will soon be seeing the “nuclear option” — central bank-created money injected directly into the real economy. All other options having failed, governments will be reduced to issuing money outright to cover budget deficits. So warns a September 18 article on ZeroHedge titled “It Begins: Australia’s Largest Investment Bank Just Said ‘Helicopter Money’ Is 12-18 Months Away.”

Money reformers will say it’s about time. Virtually all money today is created as bank debt, but people can no longer take on more debt. The money supply has shrunk along with people’s ability to borrow new money into existence. Quantitative easing (QE) attempts to re-inflate the money supply by giving money to banks to create more debt, but that policy has failed. It’s time to try dropping some debt-free money on Main Street.

The Zerohedge prediction is based on a release from Macqurie, Australia’s largest investment bank. It notes that GDP is contracting, deflationary pressures are accelerating, public and private sectors are not driving the velocity of money higher, and central bank injections of liquidity are losing their effectiveness. Current policies are not working. As a result:

There are several policies that could be and probably would be considered over the next 12-18 months. If private sector lacks confidence and visibility to raise velocity of money, then (arguably) public sector could. In other words, instead of acting via bond markets and banking sector, why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’? Whilst it might or might not be called QE, it would have a much stronger impact and unlike the last seven years, the recovery could actually mimic a conventional business cycle and investors would soon start discussing multiplier effects and positioning in areas of greatest investment. 

Willem Buiter, chief global economist at Citigroup, is also recommending “helicopter money drops” to avoid an imminent global recession, stating:

A global recession starting in 2016 led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing. . . .

Helicopter money drops in China, the euro area, the UK, and the U.S. and debt restructuring . . . can mitigate and, if implemented immediately, prevent a recession during the next two years without raising the risk of a deeper and longer recession later.

Corbyn’s PQE

In the UK, something akin to a helicopter money drop was just put on the table by Jeremy Corbyn, the newly-elected Labor leader. He proposes to give the Bank of England a new mandate to upgrade the economy to invest in new large scale housing, energy, transport and digital projects. He calls it “quantitative easing for people instead of banks” (PQE). The investments would be made through a National Investment Bank set up to invest in new infrastructure and in the hi-tech innovative industries of the future.

Australian blogger Prof. Bill Mitchell agrees that PQE is economically sound. But he says it should not be called “quantitative easing.” QE is just an asset swap – cash for federal securities or mortgage-backed securities on bank balance sheets. What Corbyn is proposing is actually Overt Money Financing (OMF) – injecting money directly into the economy.

Mitchell acknowledges that OMF is a taboo concept in mainstream economics. Allegedly, this is because it would lead to hyperinflation. But the real reasons, he says, are that:

  1. It cuts out the private sector bond traders from their dose of corporate welfare which unlike other forms of welfare like sickness and unemployment benefits etc. has made the recipients rich in the extreme. . . .
  2. It takes away the ‘debt monkey’ that is used to clobber governments that seek to run larger fiscal deficits.

OMF as a Solution to the EU Crisis

Mitchell observes that OMF has actually been put on the table by the European Parliament. According to a Draft Report by the Committee on Economic and Monetary Affairs on the European Central Bank Annual report for 2012, the European Parliament:

  1. Considers that the monetary policy tools that the ECB has used since the beginning of the crisis, while providing a welcome relief in distressed financial markets, have revealed their limits as regards stimulating growth and improving the situation on the labour market; considers, therefore, that the ECB could investigate the possibilities of implementing new unconventional measures aimed at participating in a large, EU-wide pro-growth programme, including the use of the Emergency Liquidity Assistance facility to undertake an ‘overt money financing’ of government debt in order to finance tax cuts targeted on low-income households and/or new spending programmes focused on the Europe 2020 objectives;
  2. Considers it necessary to review the Treaties and the ECB’s statutes in order to establish price stability together with full employment as the two objectives, on an equal footing, of monetary policy in the eurozone;

These provisions were amended out of the report, says Prof. Mitchell, largely due to German hyperinflation paranoia. But he maintains that Overt Money Financing is the most effective way to solve the Eurozone crisis without tearing down the monetary union:

  1. It amounts to the ECB telling member states that they will provide the Euros to permit sufficient deficit spending aimed at increasing employment and production.
  2. No public debt is issued.
  3. No taxes are raised.
  4. Interest rates would not rise.
  5. A Job Guarantee could be introduced immediately.
  6. The Troika can retire – no more bailouts.
  7. As growth returns, structural changes – better public services, better schools, better health care etc. can be implemented. Growth allows structural changes to occur more quickly because people are happy to move between jobs if there are jobs to move between.

The Bogus Inflation Objection

Tim Worstall, writing in the UK Register, objects to Corbyn’s PQE (or OMF) on the ground that it cannot be “sterilized” the way QE can. When inflation hits, the process cannot be reversed. If the money is spent on infrastructure, it will be out there circulating in the economy and will not be retrievable. Worstall writes:

QE is designed to be temporary, . . . because once people’s spending rates recover we need a way of taking all that extra money out of the economy. So we do it by using printed money to buy bonds, which injects the money into the economy, and then sell those bonds back once we need to withdraw the money from the economy, and simply destroy the money we’ve raised. . . .

If we don’t have any bonds to sell, it’s not clear how we can reduce [the money supply] if large-scale inflation hits.

The problem today, however, is not inflation but deflation of the money supply. Some consumer prices may be up, but this can happen although the money supply is shrinking. Food prices, for example, are up; but it’s because of increased costs, including drought in California, climate change, and mergers and acquisitions by big corporations that eliminate competition.

Adding money to the economy will not drive up prices until demand is saturated and production has hit full capacity; and we’re a long way from full capacity now. Before that, increasing “demand” will increase “supply.” Producers will create more goods and services. Supply and demand will rise together and prices will remain stable. In the US, the output gap – the difference between actual output and potential output – is estimated at about $1 trillion annually. That means the money supply could be increased by at least $1 trillion annually without driving up prices.

Don’t Sterilize – Tax!

If PQE does go beyond full productive capacity, the government does not need to rely on the central bank to pull the money back. It can do this with taxes. Just as loans increase the money supply and repaying them shrinks it again, so taxes and other payments to the government will shrink a money supply augmented with money issued by the government.

Using 2012 figures (drawing from an earlier article by this author), the velocity of M1 (the coins, dollar bills and demand deposits spent by ordinary consumers) was then 7. That means M1 changed hands seven times during 2012 – from housewife to grocer to farmer, etc. Since each recipient owed taxes on this money, increasing M1 by one dollar increased the tax base by seven dollars.

Total tax revenue as a percentage of GDP in 2012 was 24.3%. Extrapolating from those figures, $1.00 changing hands seven times could increase tax revenue by $7.00 x 24.3% = $1.70. That means the government could, in theory, get more back in taxes than it paid out. Even with some leakage in those figures and deductions for costs, all or most of the new money spent into the economy might be taxed back to the government. New money could be pumped out every year and the money supply would increase little if at all.

Besides taxes, other ways to get money back into the Treasury include closing tax loopholes, taxing the $21 trillion or more hidden in offshore tax havens, and setting up a system of public banks that would return the interest on loans to the government. Net interest collected by U.S. banks in 2014 was $423 billion. At its high in 2007, it was $725 billion.

Thus there are many ways to recycle an issue of new money back to the government. The same money could be spent and collected back year after year, without creating price inflation or hyperinflating the money supply.

This not only could be done; it needs to be done. Conventional monetary policy has failed. Central banks have exhausted their existing toolboxes and need to explore some innovative alternatives.

_______________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN.FM.

32 Responses

  1. This is the evidence that the economic system installed by the Federal Reserve is a Ponzi scheme. A Ponzi scheme cannot remain static. It must continually expand or it will collapse. The interesting point is that the hidden profit embezzled by the FRBNY using their exclusive handling of the auction accounts appears circumvented.
    Ref. https://www.scribd.com/doc/48194264/rip-off-by-the-Federal-Reserve-revised

  2. The term QE is from Richard Werner when giving advice to the Bank of Japan. He never suggested giving any of that money to big banks. But, that’s what Japan as done for some time, US has done for 9 years and the EU just started doing this year. Werner is the economist who pointed out that there is no research which ever proved “raising interest rates reduces inflation”.

    Tim Worstall’s article in The Register is appalling. He claims giving QE to TBTF banks in exchange for their (worthless) bonds has backed, supported, (sterilized) the money printing, so there will not be inflation from printing unlimited money for the BANKS because the huge, huge amount of money printed might “come back to the central bank”.

    However, if any money is given to the REAL economy, it will just “stay out there” circulating! It’s IS the single most idiotic remark I’ve ever heard and one more reason we can all give despise “Economists”. Hyperinflation is caused when there is a loss of faith in currency. Inflation happens when money is not being used for PRODUCTION, which is what must back, support, “sterilize” new money.

    Natural assets and assets produced already by human beings, backs most of our money supply and every dollar printed that increases the productive potential of human beings support, backs, “sterilizes” currency. Because we allow unemployment and direct credit to nonproductive TBTF banks, is why we have inflation today and will have bail-ins, hyperinflation, chaos, etc., tomorrow.

    What Ellen suggests here would stop a disaster and “turn the lights back on” almost immediately in America, England or elsewhere in the indebted parts of the World if they apply it.

  3. Dear Dr. Brown your description of PQE or OMF is very exciting and shows a strong possibility of great changes in our society. I would like to ask a few questions and hoping not to take lots of you time. What is the foreseeable repercussions on the market for the extraction of row materials like metals, gas and petrol? And on the commodities, and another example like real estate or relations with other countries? Is there a possibility that all this will increase behinds our control and possibly make the faith of our planet further precarious than now? I thank you for all your efforts to make the project of Public Banking system known through out the world and easily understood by regular people like my self. And hoping you garnering enough support to make it part of of our every days life and improve the quality of our existence on this beautiful planet. Best regards.

    • Thanks Ercole, I don’t actually understand your question on commodities and real estate. I think things must be a bit precarious, or we wouldn’t be seeing sudden talk of helicopter money from mainstream economists. See also here from Citibank —

      http://www.barrons.com/articles/citigroup-rapidly-rising-risk-of-global-recession-1441831373

      What are they worried about — collapse of the repo market and the shadow banking system? There is a dark side to which we are not exposed.

      • The better cite to the Citigroup article is here (since you don’t have to be a subscriber to Barron’s!) —

        http://investmentwatchblog.com/citibank-calls-for-helicopter-money-drops-across-globe/

        Maybe I’ll edit the article to add that and the comment below on the meaning of deflation.

  4. […] Ellen Brown Web of Debt […]

  5. I DON T KNOW WERE YOU GOT THE IDEA THERE IS DEFLATION .ARE YO NOT AWARE OF PRICES OF CARS TRUCKS ETC.AND FOOD THEY HAVE DISGUISED THAT BY DOWN SIZING THE WEIGHT AND KEEPING THE PKG THE SAME JUST LESS IN IT .INFLATION IS ABOUT 20% SINCE Q1 AND GOING HIGHER AS A FOR INSTANCE MY 2011 BUICK REGAL I PURCHASED IN JULY OF 11 WAS 30,000 FOR THE SERIES 1 TURBO THE SAME MODEL IS NOW 36.000 AND PICKUP TRUCKS HAVE GONE THROUGH THE ROOF.YOU NEED TO GET REAL WITH YOUR ANALYSIS HOUSING IS EVEN WORSE THAN 04-09 AS THE WALL STREET BANKS HAVE ORIGINATED SUB PRIME FINANCING FOR AUTOS/TRUCKS /HOMES AND JUST ABOUT EVERYTHING.YOUR ANSWER TO OUR PROBLEMS ARE NOT CORRECT.THE FED AND WALL STREET NEED TO BE CRIMINALLY CHARGED AND TRIED.UNFORTUNATELY WE LIVE IN FASCIST SYTEM AND NOT A DEMOCRACY ,BUT THEN WE NEVER EVER HAVE BEEN A DEMOCRACY .THE FOUNDERS NEVER INTENDED IT TO BE ITS A CONTROLLED REPUBLIC TAKEN TO THE END RESULT CALLED FASCISM.

    • Deflation refers to the money supply, not prices. The money supply is shrinking, because ALL money is created as bank debt (see the Bank of England’s spring 2014 pronouncement), and people and nations are not able to take on more debt. They are paying down old loans and not taking out new ones. Some consumer prices can be (and are) up although the money supply is shrinking. Food prices, for example, are up; but it’s because of increased costs, including drought in California, climate change, and mergers and acquisitions by big corporations that eliminate competition.

  6. […] Ellen Brown Writer, Dandelion Salad The Web of Debt Blog September 22, […]

  7. […] Time for the Nuclear Option – Raining Money on Main Street […]

  8. OMP is one of the greatest creative ideas I have heard from a politician in years! Let us hope that the Obama administration and Ms Yellen take a cue and at least experiment with the NUCLOMP option!

  9. […] Time for the Nuclear Option: Raining Money on Main Street […]

  10. […] by Ellen Brown EllenBrown.com […]

  11. “Adding money to the economy will not drive up prices until demand is saturated and production has hit full capacity; and we’re a long way from full capacity now.”

    Problem is demand is low due to aging baby boom generation. The millennials will still take a few years to reach there peak spending. Even then demand will never be where it was in the 90’s.

  12. […] Read More […]

  13. […] Time for the Nuclear Option: Raining Money on Main Street […]

  14. Overt monetary financing is not a new idea, it was originally introduced by Milton Friedman in 1948.

    In my blog post I try to explain what would have happened, if the UK had followed the route proposed by Friedman:

    https://radicaleconomicthought.wordpress.com/2015/09/24/pqe-how-to-cut-the-uks-debt-by-two-thirds/

  15. Jeremy corbyn is a real Socialist; a species ridiculed and banished by tony blair in his creeping quest for wealth and wealthy people. blair created the UK`s New Labour/ Conservative -One Party Oligarchy.the UK haven`t had a Socialist leading the Labour Party since Harold Wilson in 1968. since 2008 the US/UK sole financial policy has been Zero Interest Rates and Quantitative Easing/ Money Printing.this means that the Banks get Free Money and their Currencies are Devalued to Suck Wealth Upwards from the Taxpayer to the Hedge Funds, HSBC,Barclays,Goldman Sachs, Deutsche Bank etc.

  16. […] https://ellenbrown.com/2015/09/22/time-for-the-nuclear-option-raining-money-on-main-street/#more-1004… […]

  17. Hi Ellen…You are absolutely spot on about this very simple solution to this horrendous problem we have caused by the greedy, corrupt and unaccountable banks, the Fed and politicians. I have been called a “nut” for suggesting this very thing to Bill Holter who writes now on the Jim Sjnclair website. Holter is TOTALLY wrong in suggesting the default of the US govt. is imminent. It will not and cannot EVER default. It doesn’t ever have to!

    What you have so perfectly explained is EXACTLY what they can and WILL have to do eventually. It will immediately turn this economy around and will absolutely repair the mistakes of this idiotic Fed which must eventually be dissolved! Destroyed!

    Most people do not know that the income tax we all pay is used for removing money from our pockets to prevent to much price inflation. It is used to keep us from spending too much! It is used for punishment! Period! It is now NOT EVER used by the govt.! The govt. does NOT NEED or USE our income tax dollars! Those dollars must be destroyed or there would too much money in circulation and the govt. therefore could not create NEW money to spend (give) to favorite banks, corporations, countries, and cronies and still keep it secret from us of what they are actually doing with it! They can create all the money they want now, since 1971. Under the gold standard they could not do this.

    That is why in 1971 Nixon took us off the gold standard to enable govt. to screw us. Since going off the gold standard we can/could/should eliminate ALL income taxes and nothing would change EXCEPT, we would be able to keep and spend ALL of what we earned! Imagine that!
    This country would EXPLODE with prosperity! FOR ALL OF US!

    ALL govt. spending including Soc. Sec. (it can never go “broke or broken”) is merely a govt. computer entry now, or some actually printed as cash.! It is a total SCAM having us citizens and even politicians and even govt. officials believing that the govt. needs our tax dollars to so-called “help balance the federal budget or to spend on entitlements or to pay our fair share or whatever else they can find to blow the money on”!! That is an absolute TOTAL LIE! But almost ALL people involved in govt. in any way believe this!

    Check out Moselers website for an explanation about all of this. He has a pdf to download that all citizens need to read. It is a real eye opener. But read ALL of it. His background is important to clarify and verify what he is showing us.

    Bottom line, Ellen is right-on!!

    • Should have put this in to find Warren Mosler!

      Go to: moslereconomics.com
      The pdf is: The Seven Myths of Modern Economic Theory on the right side of his website. Free SAFE pdf download.

      It is a MUST read to learn how the US Govt. finances itself.

      • The efficacy of Mosler and Ellen Brown’s approach is confirmed in this great recent speech by professor Richard Werner. https://www.youtube.com/watch?v=9Um9wR46Ir4 He knows what he is talking about! Economic history (much of which can be found in Ellen Brown’s book The Public Bank Solution) proves it. Economies can bootstrap themselves by creating their own credit. How else? Why go groveling to the private usury bankers, which has been shown to be a royal road to ruin? With the advice of people like Werner, I think Russia, China, and the Eurasian economic zone will succeed, despite US opposition and military and economic warfare to prevent it, much to the benefit of the whole world. The American military empire is the international usury banking empire, and the chains of its world-enslavement will be thrown off.

        • I was much inspired by Werner’s ‘Princes of the Yen’. He’s got the point. “Let economy create its own credit.” – this is the essence, I think.
          The best way to do this is:
          1) We must reconsider the power balance between the creditors(bond holders, currency hoarders), debtors and the regulators. Regulators are serving creditors only. In other words, creditors are self regulating.
          We must end this.
          2) The burden of public debt should be shared by the whole population within the same ‘public’, not just by the debtors only. How?
          – When a foreign investor buys a national bond, he or she becomes an economic citizen of the nation.
          3) Regulation and Money creation should belong to the public, not to the handful private entities.
          – Central bank must be a national bank and must serve the nation, the public. See the case “COMER v. Canada”.(www.comer.org)
          4) The way of funding to serve the public debt must always be in order and transparent.
          – First option should be ‘taxing the public’.
          – Second option: Selling public assets.at the fair market price or with the option of repurchase.
          – Third option: Borrowing from the public at the rate of target inflation rate
          – 4th option: Issuing new public bond at the rate of target inflation rate.
          – Last option: Creating new public credit to the nation not as a liability, bur as a national capital

          Creditors should not be predators.

    • Really?
      I always thought that Nixon took the U.S. off the gold standard because so many countries – notably France, who sent a warship into New York harbour to collect their gold – started to redeem their huge U.S.$ reserves for gold, which they then took out of the country, threatening to deplete U.S. stockpiles of gold entirely. So the U.S.$ was arbitrarily declared non-convertible. No?
      Please correct my understanding if I am wrong.

  18. This is absurdity squared. Why would productivity
    increase at all, let alone to meet gargantuan demand. Who would be craze enough to go to work at all. Stay home, smoke weed and watch your fortune go through the roof watching the tape….yeah that’s the ticket. zero production, mass consumption until the shelves were empty…then the deluge.

    • With automation quite literally everybody’s going to be without a job within a few decades, zero wages means zero consumption. The only way to keep the system going will be helicopter money for all those unemployed consumers.

      • ” literally everybody’s going to be without a job ” is nonsense.

  19. One of the reasons given for helicopter money, as they put it, is the available bonds and T bills to purchase for normal QE injections are drying up, they can’t do much more than a years worth. We are all assuming the helicopter money is injected productively into the economy and not given to the usual suspects as QE/bank bailouts. Then when it fails they’ll point their fingers and claim it was a bad idea for all the normally bogus Austrian School reasons and it’s all the fault of monetary reformers the economy went in the tank.

  20. People are going to have to realize sooner rather than later that a solution along these lines is the only practical and realistic one. The system of debt-currency and extreme usury that has dominated for so long is tearing us apart. For those who think everyone will be left jobless and lazy due to automation, think again. A re-structuring of our socio-economic order based on production and sustainability rather than endless waste and consumption can keep everyone who is willing and able employed and contributing.

  21. […] ⇧   Time for the Nuclear Option: Raining Money on Main Street | WEB OF DEBT BLOG […]

  22. […] on September 22, 2015 by Ellen Brown, The Web of Debt […]

  23. […] El recaudo total de impuestos como porcentaje del PIB, fue de 24.3% en 2012. Extrapolando de esas cifras, 1 dólar cambiando de manos siete veces, puede aumentar los ingresos tributarios en 7 x 24.3% = $1.70. Eso significa que el Gobierno podría, en teoría, recibir más impuestos de lo que pagó. Incluso con alguna fuga en esas cifras y deducciones por costos, todo o la mayoría del dinero nuevo gastado en la economía puede ser recuperado por el Gobierno a través de impuestos. Dinero nuevo puede ser emitido cada año, y la oferta monetaria  aumentaría muy poco, si es que esto llegara a ocurrir. […]

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