Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation?

Fifteen years after embarking on its largely ineffective quantitative easing program, Japan appears poised to try the form recommended by Ben Bernanke in his notorious “helicopter money” speech in 2002. The Japanese test case could finally resolve a longstanding dispute between monetarists and money reformers over the economic effects of government-issued money.

When then-Fed Governor Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was talking about something quite different from the quantitative easing they actually got and other central banks later mimicked. Quoting Milton Friedman, he said the government could reverse a deflation simply by printing money and dropping it from helicopters. A gift of free money with no strings attached, it would find its way into the real economy and trigger the demand needed to power productivity and employment.

What the world got instead was a form of QE in which new money is swapped for assets in the reserve accounts of banks, leaving liquidity trapped on bank balance sheets. Whether manipulating bank reserves can affect the circulating money supply at all is controversial. But if it can, it is only by triggering new borrowing. And today, according to Richard Koo, chief economist at the Nomura Research Institute, individuals and businesses are paying down debt rather than taking out new loans. They are doing this although credit is very “accommodative” (cheap), because they need to rectify their debt-ridden balance sheets in order to stay afloat. Koo calls it a “balance sheet recession.”

As the Bank of England recently acknowledged, the vast majority of the money supply is now created by banks when they make loans. Money is created when loans are made, and it is extinguished when they are paid off. When loan repayment exceeds borrowing, the money supply “deflates” or shrinks. New money then needs to be injected to fill the breach. Currently, the only way to get new money into the economy is for someone to borrow it into existence; and since the private sector is not borrowing, the public sector must, just to replace what has been lost in debt repayment. But government borrowing from the private sector means running up interest charges and hitting deficit limits.

The alternative is to do what governments arguably should have been doing all along: issue the money directly to fund their budgets. Having exhausted other options, some central bankers are now calling for this form of “helicopter money,” which may finally be raining on Japan if not the US.

The Japanese Trial Balloon

Following a sweeping election win announced on July 10th, Prime Minister Shinzo Abe said he may proceed with a JPY10 trillion ($100 billion) stimulus funded by Japan’s first new major debt issuance in four years. The stimulus would include establishing 21st century infrastructure, faster construction of high-speed rail lines, and measures to support domestic demand.

According to Gavyn Davies in the July 17th Financial Times:

Whether or not they choose to admit it – which they will probably resist very hard – the Abe government is on the verge of becoming the first government of a major developed economy to monetise its government debt on a permanent basis since 1945.

. . . The direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act. But it seems that the government may be considering manoeuvres to get round these roadblocks.

Recently, the markets have become excited about the possible issuance of zero coupon perpetual bonds that would be directly purchased by the BoJ, a charade which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.

Bernanke’s role in this maneuver was suggested in a July 14th Bloomberg article, which said:

Ben S. Bernanke, who met Japanese leaders in Tokyo this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers. . . .

He noted that helicopter money — in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them — could work as the strongest tool to overcome deflation . . . .

Key is that the bonds can’t be sold and never come due. In QE as done today, the central bank reserves the right to sell the bonds it purchases back into the market, in order to shrink the money supply in the event of a future runaway inflation. But that is not the only way to shrink the money supply. The government can just raise taxes and void out the additional money it collects. And neither tool should be necessary if inflation rates are properly monitored.

The Japanese stock market shot up in anticipation of new monetary stimulus, but it dropped again after the BBC aired an interview with Bank of Japan Governor Haruhiko Kuroda recorded in June. He ruled out the possibility of “helicopter money” – defined on CNBC.com as “essentially printing money and distributing payouts” – since it violated Japanese law. As the Wall Street Journal observed, however, Bernanke’s non-marketable perpetual bonds could still be on the table, as a way to “tiptoe toward helicopter money, while creating a fig leaf of cover to say it isn’t direct monetization.”

Who Should Create the Money Supply, Banks or Governments?

If the Japanese experiment is in play, it could settle a long-standing dispute over whether helicopter money will “reflate” or simply hyperinflate the money supply.

One of the more outspoken critics of the approach is David Stockman, who wrote a scathing blog post on July 14th titled “Helicopter Money – The Biggest Fed Power Grab Yet.” Outraged at the suggestion by Loretta Mester of the Cleveland Fed (whom he calls “clueless”) that helicopter money would be the “next step” if the Fed wanted to be more accommodative, Stockman said:

This is beyond the pale because “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt – that is, purchase of government bonds with central bank credit conjured from thin air.

Stockman, however, may be clueless as to where the US dollar comes from. Today, it is all created out of thin air; and most of it is created by private banks when they make loans. Who would we rather have creating the national money supply – a transparent and accountable public entity charged with serving the public interest, or a private corporation solely intent on making profits for its shareholders and executives? We’ve seen the results of the private system: fraud, corruption, speculative bubbles, booms and busts.

Adair Turner, former chairman of the UK Financial Services Authority, is a cautious advocate of helicopter money. He observes:

We have been left with so much debt we can’t just grow our way out of it – we should consider a radical option.

Not that allowing the government to issue money is so radical. It was the innovative system of Benjamin Franklin and the American colonists. Paper scrip represented the government’s IOU for goods and services received. The debt did not have to be repaid in some other currency. The government’s IOU was money. The US dollar is a government IOU backed by the “full faith and credit of the United States.”

The U.S. Constitution gives Congress the power to “coin money [and] regulate the value thereof.” Having the power to regulate the value of its coins, Congress could legally issue trillion dollar coins to pay its debts if it chose. As Congressman Wright Patman noted in 1941:

The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks. I believe the time will come when people [will] actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue.

Beating the Banks at Their Own Game

Issuing “zero-coupon non-marketable perpetual bonds with no maturity date” is obviously sleight of hand, a convoluted way of letting the government issue the money it needs in order to do what governments are expected to do. But it is a necessary charade in a system in which the power to create money has been hijacked from governments by a private banking monopoly engaged in its own sleight of hand, euphemistically called “fractional reserve lending.” The modern banking model is a magician’s trick in which banks lend money only a fraction of which they actually have, effectively counterfeiting the rest as deposits on their books when they make loans.

Governments today are blocked from exercising their sovereign power to issue the national money supply by misguided legislation designed to avoid hyperinflation. Legislators steeped in flawed monetarist theory are more comfortable borrowing from banks that create the money on their books than creating it themselves. To satisfy these misinformed legislators and the bank lobbyists holding them in thrall, governments must borrow before they spend; but taxpayers balk at the growing debt and interest burden this borrowing entails. By borrowing from its own central bank with “non-marketable perpetual bonds with no maturity date,” the government can satisfy the demands of all parties.

Critics may disapprove of the helicopter money option, but the market evidently approves. Japanese shares shot up for four consecutive days after Abe announced his new fiscal stimulus program, in the strongest rally since February. As noted in a July 11th ZeroHedge editorial, Japan “has given the world a glimpse of not only how ‘helicopter money’ will look, but also the market’s enthusiastic response, which needless to say is music to the ears of central bankers everywhere.” If the Japanese trial balloon is successful, many more such experiments can be expected globally.

_________

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. She can be heard biweekly on “It’s Our Money with Ellen Brown” on PRN.FM.

47 Responses

  1. Reblogged this on Scoop Feed.

    • Helicopter money WILL work in stimulating Japan’s economy, if it is done right. In the US, George W. Bush gave us $300 at one point to stimulate the economy, but all we did was use it to pay down debt. This did nothing for the economy.

      The way it needs to be done is for the BOJ to give poor people their 30,000 yen in scrip, which can only be used to purchase goods and services in the economy and NOT be used to pay off debt. For the sake of its multiplier effect, the scrip should be “signed off” with five verifiable signatures or thumb prints (indicating that the scrip was used five times in purchasing goods and services) before the scrip can be redeemed by the banks.

      Hyperinflation is kept under control through the five-fold multiplier effect of the scrip on stimulating the economy of Japan. When scrips are redeemed, thumb prints are gathered and tabulated by computer then run up against those individuals’ internal revenue “claims to income” to ensure that black market influences are kept out of the system.

      • Yeah, I remember comedian Dave Barry saying about the money W handed out that people would go buy big screen tvs, thus stimulating the Chinese economy. There is no substitute for bringing jobs back to America. Trump’s the only one who will do that. So I don’t believe in helicopter money monetarism as a solution in itself. It assumes a closed system–that the goods purchased are produced here. Having a requirement that the money be spent soon and be spent on made-in-USA stuff might make it work.

        • Another approach might be to identify US goods and services with high US-sourced content, and give the corporations and enterprises involved substantial funding to reduce their prices, so that their goods and services become affordable to a whole new cohort of consumers.
          This could be tied-in with low carbon, low energy healthy products in order to enhance the financial, physical and mental health of people.
          This will stimulate US domestic consumption, jobs and firms, with state and federal bodies gaining taxation receipts to pay for the subsidies.
          It pays for itself while boosting economic activity to a higher level.

          • Sounds good!

          • You cannot expect an ever expanding market, a consumer-based market system, to expand indefinitely in a finite world. The “holy cow” of economics is focused on profit and power. That is why something as obviously insane as ionized radiation storage facilities exist.
            Click on, Small Is Beautiful, Economics as if People Mattered, E. F. Schumacher, 1973
            http://www.ditext.com/schumacher/small/1.html#1

  2. It will all end in tears. Yet again, the banksters are being allowed to dictate policy to supposedly democratically accountable governments.
    The governments should ignore the banksters and decide policy which will improve the quality of life for the vast majority in a society and they should stop enriching the bondsters and banksters.
    Keynes explained the differences between marginal propensity to consume (thus boosting real consumption in a society) and marginal propensity to invest (when rich people are given more money, they do not spend it but – instead – invest it; these days, this probably means speculation in financial and commodity markets).
    The solution is simple: give money to poor people and take it away from rich people. How? Increase tax rates on the incomes of rich people and large corporations while also making cash welfare payments to the poorest members of society.
    The poor will immediately spend their increased income, thus boosting real demand for goods and services, which leads to increased employment, which will lead to increased tax payments to central government, thus helping to reduce central government deficits.
    Central government should also invest long-term in capital projects which will enhance and improve social infrastructures for the future benefit of future generations.
    Why is this simple Keynesian model so hard for central bankers and government ministers to understand?
    Are they all too stupid to get the simplicity of it?
    Where Keynes’ ideas need updating is that governments need to combine together so that they all act in unison, thus ensuring that the benefit of added initial expenditure benefits all the states involved.

    • john sounds like the government we have now “”welfare for the so-called poor””and his last statement “”all government such act in unison ,is a globalist idea.must be a rothchild agneda agent.

      • What part of the term ‘banksters’ did you not understand?
        Rothschild is a bankster, as his exploitation of Israel’s illegally grabbed and occupied Golan Heights, along with Cheney and Murdoch, shows.
        Right now, the politicians and media in Britain are describing someone called Green – who wrecked British Homes Stores – as the “unacceptable” face of modern capitalism.
        Why, I simply do not know?
        Green – like Rothschild, Murdoch, Cheyney, et. al. – represents the TRUE face of modern capitalism. They don’t make or create anything.
        All they do is asset-strip everything in sight for their own selfish benefit.
        They are the reason western economies don’t work as they used to.
        They don’t create any value, which is why we are all impoverished.
        They are the principal consumers today and they are consuming us.
        That is why they should be asset-stripped for the benefit of our greater societies and the proceeds handed to us, as well as be used to invest in better infrastructures and social welfare services for us all.
        This won’t happen under Clinton or Trump, who are their pawns.
        The US intelligentsia need to start organising for 2020 NOW!
        Forget conspiracy theories and start addressing the real world.

        • Tell me in what way Trump is a pawn of the banksters and the Rothschild NWO agenda. I don’t think he is. That’s why the media and the whole establishment hates him. He’s against TPP, open borders, getting ripped off in trade, for American sovereignty, wants to tax the hedge funds, etc.

          • Check out who the Trump and Clinton daughters are married to.
            Netanyahu has – and will be laughing all the way to the White House.

            • That one of Trump’s daughters married a Jew hardly means Trump is a pawn of the banksters. Edward Snowden said the presidential race is between Trump and Goldman Sachs.

            • GOOGLE KARAITE

  3. every time i read some solution to our financial debacle i hear “”STOCK MARKET INVESTORS “” WHY IS IT WE ARE ALWAYS SO EAGER TO HELP THE INVESTORS??? EXPLAIN THAT TO ME WHEN IN FACT THEY ARE ABOUT 11% BUT 99% OF THE WEALTH.THERE ARE OTHER THINGS IN LIFE THAN ALL THE MONEY YOU CAN GRUB UP

  4. […] 7/26    Bitcoin use surges 33% a month in Caribbean amid bank flight – MSN 7/26    Japan’s “helicopter money” play – Web Of Debt 7/25    Chinese devaluation is closer than anyone thinks – Zero Hedge […]

  5. Reblogged this on amnesiaclinic and commented:
    Very interesting and useful. This needs to be sorted without the nonsense of ‘trickle down’ boosting the economy. It doesn’t.
    And austerity does not work.

  6. Good summary of where we stand today, but I’m with Stockman–horrified at the notion that the size and quality of the assets on the Fed’s balance sheet doesn’t matter to the quality of the people’s currency. And calling the Fed “a transparent and accountable public entity” is laughable. Why even keep the Fed if the government is back in charge of issuing money? As a accounting fraud to hold the government’s worthless perpetual bonds? Further, the idea that “the government “can just raise taxes and void out the additional money it collects,” is preposterous. In what universe does that happen? Finally, “neither tool should be necessary if inflation rates are properly monitored.” Another hypothetical, and merely the “perpetual” economists’ “get out of jail free card.”

    Ultimately a mildly useful article for those who don’t understand what helicopter money is, and what dastardly tricks the central bankers have up their sleeves next. But useless as a warning about the further unchartered territory we enter or the hyperinflation and currency destruction it will engender.

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

  8. […] ⇧   Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure for Debt Deflation? |… […]

  9. As I informed my local newspaper:

    ‘the idea of ‘helicopter money’, (direct provision of funds to stimulate demand) has a far older and nobler pedigree than the speculations of Milton Friedman: Ezra Pound traced it all the way back to 1766 BC when a sagacious Chinese emperor had money (in the form of perforated copper discs) distributed among his starving subjects so they could purchase grain during a famine. Moreover, in the first half of the twentieth century, Major C. H. Douglas, who pioneered the economic theory of Social Credit, proposed a National Dividend, which is an advanced version of this idea. (Source: Kerry Bolton, ‘The Banking Swindle’).’

  10. The proper way to do this is the Gottfried Feder playbook: Kick out the the banksters (Feder calls it “plutocratic big-loan capital”) and issue legal tender (vouchers for completed labor) to cancel national debt.

    http://www.newnationalist.net/2016/07/28/part-ii-countering-the-parasite-guild/

    If this is not done the parasite guild will foreclose on entire insolvent nations.
    http://www.newnationalist.net/2016/07/28/part-i-the-parasite-guild/

  11. […] https://ellenbrown.com/2016/07/25/japans-helicopter-money-play-road-to-hyperinflation-or-cure-for-de… […]

  12. […] (Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation? – … […]

  13. Ellen, thank you for the good report. You be well. Yours, Reed

  14. […] "As the Bank of England recently acknowledged, the vast majority of the money supply is now created by banks" https://ellenbrown.com/2016/07/25/japans-helicopter-money-play-road-to-hyperinflation-or-cure-for-de… […]

  15. […] “As the Bank of England recently acknowledged, the vast majority of… | Dr. Roy Schestowitz (罗伊) on Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation? […]

  16. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  17. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  18. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  19. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  20. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently Visit […]

  21. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  22. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  23. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  24. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  25. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  26. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  27. […] is what Japan is now proposing to do, with an initial infusion of $100 billion, and it is what the Fed could have done when Wall Street […]

  28. […] is what Japan is now proposing to do, with an initial infusion of $100 billion, and it is what the Fed could have done when Wall Street […]

  29. […] central bank would have to announce that the debt would never be collected on. This is similar to the form of “helicopter money” recently suggested by former Fed Chairman Ben Bernanke to the Japanese, using debt instruments called […]

  30. One possible solution might be to scrap all banks and money.
    This would mean a totally socialistic society.
    Peoples’ needs are met through central planning and allocations.
    Peoples’ housing would be allocated according to where they work.
    They would all be allocated a clothing and footwear allowance yearly.
    Public transport systems would be free to use – no charge to use.
    All entertainment and leisure centres would also be free to use.
    All healthcare centres and hospitals would be free to use.
    The only real need for banks and money would be solely external.
    Such a system would have to start in one state and be extended.
    The whole of the United States would end up bank and money free.
    With modern computer and AI systems, this is now all possible.
    People could work / produce in line with long-term development plans.
    Imaginary money would then be replaced by real achievement.
    Achievement based on intelligent analysis, real goods and services.

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