What Is Monetary Financing?
I see some news articles or other documents about the risk of helicopter money, but what confuses me is that stories turn to monetary financing without due explanations as though helicopter money self-evidently comes to monetary financing. Does helicopter money necessarily mean monetary financing? Or does monetary financing necessarily mean helicopter money?
I think, the answers are no, to both the questions.
The aim of helicopter money should be to give away money to the public, not to the government. For example, if the central bank literally scatters money from a helicopter, it has nothing to do with the government finance.
Right.
Then, why does monetary financing make an appearance on the stage as though helicopter money means directly monetary financing?
The central bank won't literally scatter money from a helicopter because it can't deliver money fairly or to intended entities that way. In fact, it doesn't have any appropriate means to deliver money to intended entities. So, it delivers money through the government.
Then, the central bank gives away money to the government not as a purpose, but as a means.
Yes. That's because the government has means to deliver money to the public in more controlled ways, for example, tax cuts.
Hmm, . . . so, helicopter money doesn't intend to pass money to the government, but in reality, it most likely has to pass money to the government.
At least, that's the way being usually considered to deliver helicopter money.
The central bank delivers money to the government by buying government bonds, right?
As far as I know, that seems to be the principal scheme being considered.
But buying government bonds isn't giving away money; it's just exchanging money with government bonds.
Monetary financing means that the central bank directly buys government bonds, but it isn't helicopter money itself: the government doesn't just get money; the government gets the debt too.
I heard an insistence as the government doesn't have to repay debts or pay interests to the central bank because the central bank is a subsidiary. That isn't correct, is it?
Is that so on the Bias planet? I don't think so. Independence of the central bank from the government is thought to be necessary even on the Bias planet, and the government isn't allowed to happily welsh on debts to the central bank. As for interests, it's a fact that the central bank gives its profits to the government, and one may think that interests paid by the government to the central bank is destined to be returned to the government anyway, but that won't be always the case: if the central bank suffers losses because of helicopter money, the interests payed by the government won't be returned to the government because they don't remain as profits. Even the government shouldn't be allowed not to pay promised interests.
The government may issue interest-free bonds in collusion with the central bank.
It may, and it's quite likely to do so, but that's another issue. I said that bonds bought by the central bank don't automatically mean no necessity for the government to pay interests: interest-free bonds are interest-free because they are interest-free, not because the central bank bought them.
Well, for monetary financing to be helicopter money, the bonds have to be perpetual bonds with no maturity date. Just buying normal government bonds isn't helicopter money, but buying bonds and not requiring repayments for ever is no different from just giving away money. . . . But 'perpetual bond' sounds bogus . . .. A debt the borrower doesn't have to pay back isn't a debt at all: it's a self-contradiction.
In fact, it doesn't have to be explicitly perpetual bonds: if the central bank eternally continues to buy new bonds in order to let the government repay matured bonds, that's almost the same thing. Of course, it isn't exactly the same thing because the central bank retains at least the nominal option to stop buying new bonds. However, if the central bank doesn't have any actual option or any intention to do so, it's practically the same thing.
And will the central bank insist that it isn't helicopter money? Dirty fellows . . .
Besides, whether the central bank buys government bonds directly or indirectly, the central bank is already buying government bonds in QE. Government bonds are just temporarily going through the hands of financial institutions. Isn't it monetary financing?
If government bonds go through the hands of financial institutions just for formality's sake, it will be effectively already monetary financing, whatever the central bank or the government insists.
How can we judge whether it's just for formality's sake?
If financial institutions buy government bonds only because they expect that the central bank will buy those bonds at higher prices, that will be monetary financing.
Ah, that is, the central bank is forcing financial institutions to buy government bonds, not buying government bonds that have been naturally bought by financial institutions.
Well, financial institutions are being happily forced because they get profits, but I understand what you mean.
How Is Helicopter Money Related to Monetary Financing
Helicopter money isn't always monetary financing even if monetary financing is the principal way of helicopter money, is it?
When the central bank buys assets at higher prices from financial institutions in QE, it's effectively giving away money to those financial institutions. That will be very helicopter money, whatever the central bank claims.
So, QE is already scattering implicit helicopter money.
And one time monetary financing isn't helicopter money, but permanent monetary financing is.
That's our understanding.
What is the real risk of monetary financing?
There are people who promote monetary financing and people who warn against monetary financing. Which is correct?
Ah, . . .
Ah?
An important unpredictable factor is irrational reactions by people. After all, the result depends on vague so-called 'credibility' of the monetary system people feel: usual warning is that the credibility of the monetary system would be damaged.
Ah, that usual vague claim. . . . Doesn't that mean that people are just ignorant? What promoters of monetary financing claim is that monetary financing isn't a problem. If that's so, doesn't just educating people so prevent the damage to the so-called 'credibility'?
In fact, the economy is moved on the base of reactions by ignorant people. Theories based on the supposition that people have been enlightened may be interesting as thought experiments, but can't be expected to represent the reality.
Ah, after all, if ignorant people react irrationally, even if theories by promoters of monetary financing are basically correct, problems will happen.
We will have to suppose that people are ignorant and will act irrationally.
I understand that inflation will happen. But, if the value of money becomes half, it doesn't matter if each of people has proportionally double amount of money. Nobody loses anything. But why should hyperinflation happen? Why does the value of money have to become 1/10, 1/100, 1/1000, or whatever?
Detailed mechanisms aside, because, in short, 'the credibility' is damaged, and people overreacts. As far as the economic system depends on the vague 'credibility', problems will happen if people doubt the 'credibility' because of ignorance, beliefs in intuitions, whims, or whatever.
Isn't people who warn that monetary financing will damage the 'credibility' just inciting the damage of 'credibility'?
That's a chicken-or-egg question. Even if you refrain from the warning, others will continue the warning, and the damage of the 'credibility' will happen. So, it follows that after all, you should warn as a honest duty, because it really happens.
Hmm . . .
