Underlying it is a certain excitement. We had been seeing strange characters wandering around the hangars and offices for some time. Definitely civilians and always with dark glasses. Maybe they were trying to pass themselves off as people from the services or security but it was clear to us that they weren't. Overly elegant pinstripes, no headset and above all that fish out of water air.
Finally they rounded us up and introduced them to us. First, however, they made us sign a mountain of papers with which we pledged absolute silence. These gentlemen, we were told, are officials of very important international financial institutions. They will prepare you for a special mission. You are the best in your flight courses, you all have years of experience and are trained in theaters of war, in rescue and public order operations and in the transport of civilians. But here we are dealing with something absolutely new. Be careful, though. The mission isn't certain yet, and in any case we don't yet know the times and methods. Above all, it is not clear whether it will be a one-off or if it will become a regular, almost routine activity for you. However, you must be ready and that is why you will be given theoretical and motivational training. You will be placed in an elite corps and earn good money. One day you will also be very popular and well-liked, but know right now that the training will be intense and severe.
And that's how the weirdest and most fascinating course we've ever taken began. They began lightheartedly and subliminally, with the August 1918 footage of D'Annunzio throwing irredentist leaflets over Vienna from his airplane and the 1989 Batman scene in which Jack Nicholson tosses dollars like confetti from a parade float along the streets of Gotham City. It is here that those of the helicopter taxis, who set up on their own, made money and read the business press, put on the face of someone who had already understood everything.
The first lesson was given to us by a historian. I will tell you, he began, about relationship between sovereign and money in history. Up until the end of the XNUMXth century, the sovereign decided by himself how much coin to issue. Of course, there was the constraint of the intrinsic value of the coins, their gold or silver content, but the sovereign could cheat the cards and force his subjects to accept coins whose gold content had been diluted. Countries that had refused to resort to this stratagem, such as England, at a certain point found it convenient to rely on a bank, in this case the Bank of England, to have their war debts periodically refinanced, offering the public irredeemable bonds with a good rate in exchange for the old redeemable bonds. For some time the central bank retained a certain autonomy, but already with the French Revolution and the wars that followed, the sovereigns took full control of their issuing institutions.
Until 1951 central banks were in practice branch offices of their respective treasury departments. There were always frequent cases in which the central banks they financed the Treasury deficit, sparing it the need for public debt. In 1951, having overcome the imbalances created by the war and brought the public debt back to acceptable proportions, the US Treasury and the Federal Reserve signed an agreement under which the Fed would never again directly finance the Treasury. This separation, adopted to empower the sovereign and force him to face the market without the comfortable protective net of the central bank, was later adopted in all industrialized countries and is now the general rule.
Nice thing, you will say, but from 1951 to today the debt it has continued to grow and has returned in many countries to levels that had previously been typical of wartime. After the 2008 crisis, the stock rose by another 20-30 percentage points of GDP (lower tax revenues and higher expenditure on shock absorbers) and is still manageable only because the rates to be paid are zero or negative. But what if there were another crisis, even smaller than the one in 2008?
You already figured it out, we're going back to the pre-1951 world. The other teachers will explain the details to you, but in the meantime, two things are clear. The first is that it is not historically true that debt monetization always generates inflation, just as it is not true that everyone who drinks a glass of wine with meals today will end their alcoholic days.
Everyone remembers the troubles of Germany of 1923, when 2300 printers worked day and night to print brands and everyone has in mind the Zimbabwe of the last two decades. But few remember Japan in the 1935s, which avoided deflation and crisis by devaluing and monetizing new public spending. And no one mentions Canada, which from 1975 to XNUMX repeatedly resorted to monetizing public investment programs without incurring additional inflation.
Moreover, inflation created by the central bank and that created by ordinary banks through the credit multiplier is often not properly distinguished. To those who rightly point out that bank credit often ends up creating inflation in real estate and on the stock exchange, one could answer, as does Adair Turner, that the future monetization of public debt could be balanced by a tightening, this time fully justified, of the capital ratios of ordinary banks.
The second thing that is important to understand is that, while monetization has historically been imposed on central banks by sovereigns, what is being discussed in this period is a monetization decided autonomously by central banks on general monetary policy considerations. It's quite a difference.
The next day, after sleeping fitfully, we were overwhelmed by a lesson from an unspecified central bank official. He told us about the Quantitative easing and its limits. With Qe, he told us, the central bank buys public debt but does not pay it off. Qe is presented as a temporary operation. The securities bought will one day be sold. Whether it's true or fictional (who talks about exit strategies anymore?), the alarming data on the stock of public debt remains well impressed on the public. The 270 of GDP debt frightens the Japanese and the 133 certainly does not reassure the Italians.
Then, in the Japanese, Italians and many others, the so-called Ricardian equivalence is triggered, i.e. the awareness that this debt will one day have to be paid (probably with new taxes) so that, instead of rejoicing and spending on today's tax cuts, it will be the case of saving what is given to us today because it will be taken away from us tomorrow. Let me be clear, Ricardo was a sober and rational man who lived among sober men in a sober age.
Today, if a check for 10 dollars from the government arrived at your house, many of you would rush to spend it or play dice without thinking about the corresponding increase in the public debt (consensus buzz in the room). In sober Japan and among the wealthy around the world, however, the Ricardian equivalence works very well even today and it is for this reason that Qe struggles to increase the propensity to consume.
Think instead what would happen if the 270 Japanese GDP debt, half in the hands of the central bank and other public entities, were lowered to 135 tomorrow thanks to the cancellation of credits from the Bank of Japan. Everyone would feel like a heavy weight off their weight and would be more ready to spend. There would also be room to increase public spending again by 5 or 10 percentage points without creating particular problems.
Sure, some would point out that the central bank would then find itself with a big hole, i.e. with negative assets, and that this would more or less amount to the end of the world. However, one day would pass, two would pass and we would see that life continues as before (better than before) even with a central bank in technical default. Everyone would continue to willingly accept banknotes issued by the Bank of Japan, which could in any case settle its accounts by creating new yen and depositing it on assets.
But as you will say, there must be a trick somewhere, there are no free lunches. But no. In the right doses 100 dollars of monetization they work much better than $100 Qe. The only problem, not a small one, is that governments, relieved of a part of the debt, would have no incentive to make themselves and the country they govern more efficient. But we can already see this laziness today with the Qe, which has de facto removed the political classes from responsibility.
And then, if we have to do something, in short, that is at least fun and not the infinite sadness of negative rates. On the third day, a legal expert spoke. Politicians, he told us, never cut ties behind each other and the divorce between governments and central banks has never been made as irreversible and total as it seems. For us lawyers, it is child's play to find possible loopholes in existing legislation. The United Kingdom, moreover, used in 2008 a clause that allows the central bank to advance money to the Treasury without a precise deadline. The US Treasury, which mints money (but does not print banknotes), could for its part issue a one, five or ten trillion coin and deposit it at the Fed or spend it as it wishes (this was discussed in 2009).
Germany, in its anti-inflationary frenzy, has imposed a ban on the ECB from financing governments, local authorities and businesses, but has forgotten about individuals. And that's where you and your helicopters come into play. The ECB would not be violating any rules if it decided to have you throw banknotes from your machines all over the eurozone. Oh sure, there would be millions of applications to the European Court of Justice, but you would have already returned to your bases mission accomplished. And in time to carry out a second one, which perhaps you haven't thought of yet, that of spilling the public debt securities purchased in these years since the ECB.
Too spectacular? True, but there is an opportunity cost to these things. The credit to the current account or a tax bonus would be more serious and respectable than the money thrown from the helicopter but they would strike the imagination less and a greater monetization would therefore be necessary to achieve the objective. If the Treasury of the various European countries issued a perpetual zero coupon (which if you think about it for a moment is worth absolutely nothing) and gave it to the central bank in exchange for the BTPs and Bunds held by it, the effect would be the same, in accounting terms, as the your launch of titles in the crater of volcanoes. Psychologically, however, it would be different.
The following days of the course were devoted to technical issues (how close is it possible to an erupting crater, how to throw money in particularly windy conditions) but the gentlemen in pinstripes continued to mix with us in the canteen and at the coffee machines. In that more informal atmosphere they let themselves go a little more. You are a metaphor, they confided to us, and you will never go on a mission. But as a metaphor you will be invaluable, because you will enhance the effect of apparently aseptic measures.
As for the times, they told us in a low voice, they are closer than one thinks. If the fear of January and February was enough (with no recession, no default, no real stock market crashes) to give such a strong acceleration to the monetization debate, let alone what will happen in the presence of a real recession, even a very superficial one.
Japan will be the first to explore this path, even in the absence of a recession. America will have to wait for the elections anyway, but whether it's Trump or Clinton, no one will put obstacles in the way of the Fed if it deems the time ripe. America, in any case, is the country that least needs helicopter money over the foreseeable horizon. In fact, before monetization we will have time to see full employment and other rate hikes.
Europe will come last, as it always does. First it will cry foul, as it did with the post-2008 American devaluation (except then devaluing the euro in 2014), with the Qe of the others (except then adopting it too) and with the zero rates of the others, judged disloyal and then adopted with enthusiasm.
We will start with modest amounts, to minimize the negative impact on the long end of the debt curve. The effect on stock markets will be positive. In fact, reversing a trend towards stagnation or recession will reward the compression of multiples deriving from an increase in rates.
Will it be possible to avoid addiction to something so beautiful and fun? Time will tell.
