E Hope For The Real Economy, Pigou Effect, TLTRO Helicopter Money

Eric Lonergan defined, precisely, direct applications of helicopter money sans fiscal burden on governments. Now Mr Lonergan is defining a new kind of helicopter money, with the same principle of base money but through a lending mechanism from the ECB to banks that has a perpetual quality to it.

Lonergan explains a mechanism by which the ECB is actually involved in a program of helicopter money. Certainly, the Eurozone, in my opinion, is not the ideal venue for this process, because of issues regarding the fusion European State. But as things quiet down to a sort of equilibrium and status quo there, it appears that the central bank, the ECB, is really on the ball when it comes to monetarism.

Lonergan has said that other central banks have not taken monetarism and helicopter money seriously enough. So, here is the plan for the Eurozone as he explains it.

There are two types of  interest rates. One is the official rate. It is negative in the Eurozone. Lonergan gives arguments that this rate may be causing a tightening. This is not necessarily the view of market monetarists, who I have written about often, depending on which side of the bed they role out of in the morning.

But for Lonergan, there is evidence for this tightening.  Lonergan points to Japan as proof, early proof, that negative rates may result in a slowing of the economy and a strengthening of the currency.

The second type of interest rates is what is called the Targeted Long-term Refinancing Operations

(TLTRO) and goes according to the Friedman rule, that the central bank is never impotent, though so many monetarists seem to think so these days.  Lonergan says:

But what if households held all the base money, and furthermore the amount was increased dramatically? Surely then a Pigou effect would be large. This line of reasoning in fact pointed me towards cash transfers (as I argued in the FT in 2002).

I was reminded of this line of reasoning when recently re-reading Milton Friedman’s 1968 AER presidential address. It is famous for its critique of the Philips curve. Reading it today, it is far more interesting for its perspective on Keynes – presenting a much more interesting perspective than that of today’s “New Keynesians”.

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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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