Delusional MIT Economist Wants The Fed To Helicopter Drop Money

  The Keynesians must be really desperate. In an article titled "A helicopter drop for the Treasury," MIT economics professor Ricardo Caballero wants the US government to cut taxes for everyone. So far so good, but there is a catch: the Federal Reserve will have to print enough money to make up the expected loss to government revenues. The key for Mr. Caballero is to cut taxes while not increasing the public debt (since when did Keynesian's care about the national debt?). According to this classically trained economist, printing money is the solution to all of America's problems. It will magically put the US on a road to recovery and prevent the US from falling into the liquidity trap. It really takes a Keynesian economist to come up with this incredibly insane idea. Unfortunately, this is the best idea the Keynesians have and what's scary is that the Fed might like this plan. Here is the article:
Quantitative easing, when directed to Treasuries, adds a little bit of good to the mix by lowering the cost of funding public debt, and it also helps a little bit with the long-run cost of capital for the private sector. But these are second-order effects; the Treasury still increases public debt at a fast pace, and a slightly lower cost of capital doesn’t much help the private sector if aggregate demand is not there to buy the goods in the first place.

Instead, what we need is a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a “helicopter drop” targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury.

Critics may argue that this is simply voodoo accounting, as it is still the case that the consolidated balance sheet of the government, which includes the Fed, has incurred a liability. But this argument misses the point that the economy is in liquidity-trap range, and once this happens the system becomes willing to absorb unlimited amounts of money. In this context, by changing the composition of the liabilities of the consolidated public sector in the direction of money, the government gets a sort of “free lunch.”

Critics can also argue that even if the above logic holds during a liquidity trap, things can get quickly out of control once we are out of it. I counter that this can be solved by having Fed mechanisms ready for a quick drainage once the economy is out the woods (the Fed has already been working on the design of these mechanisms) and by adding a contingency to the helicopter gift. For example, the Treasury could commit to transfer resources back to the Fed once the economy returns to full employment.

From the point of view of public debt stability, the scenario to be concerned with is a combination of large fiscal deficits with stagnation. By making public debt contingent on the end of stagnation, this dreaded scenario is averted. And by having this contingent debt being held by the Fed, there is the added benefit that the ineffectiveness of monetary policy in the neighbourhood of a liquidity trap is turned on its head by acting instead as fiscal policy.
  In other words, the more spending, the better. God help us if this is the best academia has to offer when it comes to economic theory! More concerning is that Mr. Ricardo Caballero is a respected academic who has a impressive bio:
Ricardo J. Caballero is the Ford International Professor of Economics at MIT, Co-Director of the World Economic Laboratory, and Head of the Economics Department. A Chilean native, he received his Ph.D. from MIT. Before returning to MIT, he taught at Columbia University for three years, and was an Olin Fellow at the NBER. Caballero has also been a visiting scholar and consultant at the European Central Bank, the Federal Reserve Board, the Inter-American Development Bank, the International Monetary Fund, the World Bank, and several central banks and government institutions around the world.
   Now I know where he gets his idiotic ideas regarding monetary policy. If this is what passes for modern economic theory, we are doomed. What I think is really happening is that the Keynesians are panicking; their whole economic system is failing and is on the verge of collapse. The great 30-year credit bubble cannot be re-inflated. This is their last ditch attempt to delay the impending destruction of their fiat money bubble system. It seems from the actions of the FED that the Keynesians are not going to go quietly. They have  become nearly deranged and willing to sacrifice then entire world economy (through hyperinflation) to protect their theories. No wonder gold is near record highs!

As we have discussed on this blog the only option for the Fed is to print money. Here are a few related articles:

Bernanke Explains How To Escape The "Liquidity Trap"

Is The Fed Really Out of Bullets?

The Federal Reserve's Plan To Destroy the Dollar

Surviving Hyperinflation

Black Swan Insights


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