German Central Bank Warns About Free Cash
I am constantly skeptical of the term “helicopter money” as bandied about by the average economic writer. “Free cash” is what I consider helicopter money.
The typical headline reference to helicopter money is some sort of discussion about QE, monetary printing, central bank asset purchases, etc., not free money.
Today, Jens Weidmann, head of Deutsche Bundesbank, Germany’s central bank warns about helicopter money, and he really means helicopter money, as in “free cash”
“Helicopter Money” Hurts Banks
Bloomberg reports “Helicopter Money” Hurts Banks, ECB’s Weidmann Tells Newspaper
European Central Bank Governing Council member Jens Weidmann warned against starting a discussion about handing out cash to stimulate growth, Funke Mediengruppe reported, citing an interview.
“Helicopter money isn’t manna falling from heaven, but would rip huge holes in central bank balance sheets,” Weidmann, who heads Germany’s Bundesbank, said, according to the newspaper. “The euro area states and taxpayers would pay the bill in the end.”
“Instead of suggesting ever more reckless monetary policy experiments, it would make sense to pause,” Weidmann was cited as saying in German. “Monetary policy is not a panacea, doesn’t replace the necessary reforms in individual countries and won’t solve all of Europe’s growth problems.”
Weidmann was also cited as saying he was not convinced on the whole by the measures the ECB announced this month. “I’ve always said the effect of ultra loose monetary policy gets weaker the longer it lasts. At the same time, the more you put your foot on the gas, the bigger the risks and side effects become,” Weidmann said.
Separately, Weidmann said he doesn’t think that eliminating the 500 euro note would “noticeably” reduce criminal activity. Such a move would also present a logistical challenge, he said, according to Funke.
Discussion Underway
Weidmann’s warning “against starting a discussion about handing out cash to stimulate growth” means precisely one thing:
A discussion regarding “free cash” has already started.
Mike “Mish” Shedlock
““I’ve always said the effect of ultra loose monetary policy gets weaker the longer it lasts.” – How about “limited edition free fiat money” ?
Or ‘ restrained manic purchasing gifts’ ?
“By the way Mish, since when did you start giving serious consideration to the opinions of a central banker?”
Weidmann is correct. You would be wise to listen to him.
And please knock off your self-promotion in every comment. I am going to start deleting comments with those references.
Let’s see, they’re NOT going to change their adherence to their GARBAGE economic theory, so its:
A.
1. They continue to give money indirectly to the 1% via asset inflation.
2. They hurt ME even further with ZIRP or even NIRP.
3. Everything comes crashing down.
OR
B.
1. They helicopter drop money directly to ME.
2. Everything come crashing down, hopefully sooner.
Hmmmm, I think I’ll go with B, Alex.
When you bail out the individual and implement a retail discount the crisis is over and stability is finally enabled in virtual perpetuity.
Does virtual perpetuity have an address?
May continuous change be described as stable?
Do you think retail discounts and individual bailouts solve those?
Imagine that though, instead of creating debt in your name to pay people to tell you what to do, they will just give you money. Product of a guilty conscience I say, would not touch it.
“May continuous change be described as stable?”
Yes. You just have to truly understand the meaning of process and flow.
“Do you think retail discounts and individual bailouts solve those?
THE SYSTEM ITSELF is cost inflationary. Thus giving people a COSTLESS supplementary GIFT of income in addition to what they make via employment is in actuality the ONLY valid economic solution to the system’s inherent problem. A discount to prices at retail sale AFTER businesses have discovered/decided on their most competitive price:
1) causes no agent any harm because it is the terminal end of the entire economic/productive process.
2) prevents price inflation
3) fits seamlessly within profit making systems because every cent of their discounts to consumers is rebated back to the participating merchants
4) is not wage or price controls in any way because it is AFTER the business has already determined what its price will be
5) Can be price deflationary without harm because of #3
In reply to your previous comment under Faber and this one :
Firstly you need to set your parameters .
I can happily describe an economic circuit where the owner is he who has staked out a piece of land , built a shed and gathered a few neighbours to bake bread . One contributes wheat he collects from the wild , one grinds , one bakes etc. . The owner hands out credits according to time or effort or agreement , so for fifty loaves there are fifty credits , he earns ten … let us say there are four workers and they earn ten each also . This is their ‘money’ . It matches .
Now if you have a problem with the owner owning we are venturing into the wide world of moral philosophy and law.
If you want to bring in a parallel currency that these credits are traded for , then we are looking at the meaning of that currency in terms of its natural worth , or if it is fiat imposition, or other.
If you want to imagine that the owner prints more credits than there are loaves and undercuts his workers share , then we are out of the essence of the framework described .
In short , you seem to be looking at wider monetary reality as a detached phenomena which invades good practice , and so provide a solution to that from above , not at the root which would be safeguarding the representation of worth as a pre-existing and natural accord .
Maybe under a specific legal and monetary framework yours would be or seem to be a solution , but from my understanding the unit that is used to represent worth only does so properly if it is not tampered with , and if it remains the property of the individual .
Gifting is fine , but only if it is done by the individual and by his own free will .
As workers outnumber owners you might just have the vote on your side , but as a whole you would be ruining the concept of , the incentive to , ownership and profit . That generally does not end well , no matter the theory behind it , and tends only to occur successfully in small disciplined communities that have either a common higher goal firmly accepted as reason , or strong traditions that govern the respect of participants .
There are other additional costs besides depreciation, but it is the best and most glaringly obvious example of why an increasingly capital intensive economy is inherently cost inflationary. If a business borrows $1 million to start up and build its plant and means of production and that plant and productive capability costs $600k, then as such concrete assets depreciate it is going to have to garner $1.6 million plus profit, plus interest, plus other miscellaneous additional costs…..and yet there has only been a total of $1 million dollars distributed….with which to liquidate all of those costs. Virtually every enterprise faces this same conundrum of a scarcity of total individual incomes in ratio to total costs/prices and so the flow of that ratio is a basic macro-economic instability. Of course we can keep things going for a season by borrowing more and more money which the Banker is happy to do, but that only enriches him and ends us up in the mess we’re currently in. And innovation and AI are extremely disruptive aggregate monetary deflationary forces that are really just getting started to boot.
Integrating monetary Gifting into the debt based money system with a universal dividend to everyone 18 and older is the only valid and effective way to equilibrate cost/prices and individual incomes, and a retail discount placed at the proper place in the productive process (retail sale) is the only means of eliminating both demand pull inflation and (if we’re smart and economic as in efficient) making actual price deflation the trending reality.
I find your example confusing as you seem to count the cost of building the plant twice. Here is a similar simple example involving debt, I will use gold as currency to simplify:
A company borrows 100 gold coins to buy its property and build its business. In fact in this little town there are only 100 gold coins held by Mr. Rich and rarely circulated, and he has lent them at 10% interest The previous owners of the property and builders of the plant are paid these 100 coins.
Now the business pays its worker and owner with the aforementioned credits, 50 of them. The owner of the business must pay back the 100 gold coins by exchanging his bread for them over a number of years. If he and Mr. Rich calculated wrong, they become a bankrupt business whose ownership is given to Mr. Rich in compensation. If the business owner calculated properly he will repay the coins plus interest. How will he pay interest if there are only one hundred coins? He will sell bread to Mr.Rich for coins already repaid and pay it with those.
The cost of bread will decrease. When the enterprise is built there will be a new supply of cheaper additional bread to the town, I say cheaper in the sense of time efficiency. People will have a choice of continuing to make their own or to do some specialized work they enjoy to pay for it. And so on.
Even the bread that goes to repaying the coins will be placed on the market openly by, or on behalf, of the coin owners, or it will be exchanged for coins won off the coin holders by others . The business is creating a surplus to justify its existence, and at a cost justified to the workers by their share of production.
Once the initial debt is repaid the cost of bread should go down, as there will not be a portion reserved for the sole use of certain receipts but instead openly placed in exchange on the market. Equally the workers, if the business is their joint enterprise, will simply from then on be taking home the surplus created due to the end of debt servicing.
Time, ability to enterprise, resources, are limited in the real world, and people compete for their allocation. The currency is supposed to be a reflection of that competition, and yet you seem to think to possess a means to arrange it for the better with some bureaucratic meddling of accounts.
Crys,
There is no confusion. Productive means wear out, require maintenance and/or become obsolescent and all of these costs must be paid for by businesses or it will stop producing and go out of business. And of course every business must calculate and save for these realities by including them in their prices, or again…go out of business. Staying in Business is incredibly difficult especially for the small to medium sized variety. The inherent individual income scarcity makes the system unnecessarily unstable and austere to the point of onerousness for both business and the individual, and Austrianism, libertarianism and conservatism play into that condition instead of making the system humane and graciously flowing as any human system whose point must be that it serves the individual ethically should be. This is why those who always grouch about entitlement, “free lunches” etc. etc. ad nauseum are actually unconsciously working (no matter how much they might claim to the opposite) for further Bank dominance and an eventual socialism or fascism. They miss/refuse to look at the inherent scarcity of total individual incomes in ratio to total costs/prices and at the only valid economic way to resolve the situation.
“THE SYSTEM ITSELF is cost inflationary.”
A cycle has two phases. The system is inflationary and deflationary.
Ron J :
It is inflationary/deflationary under fractional lending.
So for example, in the first example provided, the owner does not distribute 50 credits of one loaf each day for the 50 loaves produced. Instead he employs an accountant who is in effect a CENTRAL BANKER. This banker is allowed to control the credit accounting. So every day he writes out fifty credits of one loaf to be distributed to the enterprise, and he collects those returned in exchange for a loaf and bins them. The outstanding credits are represented by loaves waiting on a shelf.
Then one day, the banker is having a chat with an employee. The employee describes how he will have to save a month’s spare credits to buy a nice vase. You see, these credits are circulating as money in that little town, and are commonly used as payment. The banker thinks, hmm, ‘ if you like I will forward you the credits you lack and you repay me in a months time… I shouldn’t really as I have to write out pretend credits… you will have to, ahem, pay me one for doing so ‘. The worker accepts and monetary expansion has taken place, that would lead to false competition and inflation…
Now the owner of the enterprise catches on to this one day and likes the idea, but so does the local policeman, and he doesn’t. They all sit down to discuss. They arrive at a hasty conclusion that seems to satisfy all sides:
The banker may borrow and lend credits, claiming a fee for doing so, paying an earning to those deposited with him, and claiming an interest on those borrowed from him. He must keep a few handy, a percentage, in case depositors want to withdraw them. The policeman will be paid extra to watch that it all fits and give his seal of approval.
What happens next is that people start lending to the bank due to the earnings offered. Every spare credit in circulation is deposited there and lent out again at the discretion of the banker. This speeds up the circulation of credits and increases the amount of debt based in those credits. It is forward lending, it is inflationary.
Then along comes the mayor with a big smile on his face. He wants to borrow some credits on behalf of the town. His promise of repayment is the best, he says, because he can order the policeman to confiscate all the credits for repayment if necessary. The banker nods, knowing that if that is done the economy will collapse, but aware that he will be making a powerful friend. He voices his concern to the mayor. Fear not, says the mayor, as my authority is absolute you will have the right to issue all the credits to the town that you wish to, and it will be superior to that backed by a loaf of bread because it will be backed by my authority on behalf of every citizen. The citizens will love it, I will employ them to, and those that do not will be forced to all the same.
And that is a brief explanation of how we end up with the system we have today, how money changed from being a direct and true representation of goods, services and production, and ended up as a tool of finance and the political elite, to be used at their own discretion. This is why it is said debt is created first, monetization then follows. Issuing credit that need never be repaid is monetization of debt at the expense of savers, in all but name.
Helicopter drops are direct monetizations but based on criteria of social management where existing debt is only one of many pretexts.
“A cycle has two phases. The system is inflationary and deflationary.”
Precisely. But understanding the ACTUAL reason for the inflationary cycle is key to resolving the instability of the system and avoidance of harmful deflation. As I have been pointing out my policies would enable beneficial and humane price deflation within increasingly profitable profit making systems.
Central Bankers have no concept of actual wisdom as in balance. Their warnings without knowledge of a retail discount policy….are folly.
mish – re driverless cars – what would happen in the event of a crash – who is the counter party for the driverless car? no driver so whose fault assuming a driverless car was involved in a crash and it was the fault of the driverless car?
Rules still needed
Crashes will be less – likely no-fault kicks in, each side pays
Mish
Helicopter money with no retail discount policy. That is the “Wisdom” of central bankers. Integration is the process of Wisdom, and the integration of a universal dividend and a price deflationary retail discount is the ACTUAL AND ONLY ETHICAL and MONETARY AND ECONOMICALLY VALID Wisdom and way out of this mess.
First they say it, then they do it. Right now, Mother Janet is ” researching” negative interest rates.
Beware! When Central Bankers tell the truth, sh*t is about to hit the fan.
My thought about helicopter money is that in whatever form it takes (if it takes), it will not benefit me. Why, exactly, should the powerful let power be given to the powerless? They will, of course, be sure that it benefits them.
So… in what form might I expect helicopter money? How about the government running up its debt sheets to take on all the public servant pensions?
One of the most powerful, wealthiest classes of American today is the government employee/beneficiary.
If it were free money, by the government for the people who run the government (nete that this flies directly in the face of govt of the people,by the people, for the people) then basically it would have all the negative effects of helicopter money, with maximum pain all the way for me, my family, and poor people like me with a job.
if they are really talking about “free cash”
then that is some thing which you can be 100% certain that
everyone is going to be in favour of.
( i hate to think about what the downside might mean)
People don’t look down when they are getting their hands on something for ‘free’. There are different ways to consider the effect. Ownership may be seen as the ability to purchase, and so helicopter money might be understood as rearranging the current scheme of ownership. To others the unserviceable debt they hold of miscalculated past purchase will become valid. To those who gave credit carelessly, their ‘effort’ will be repaid. To those that wish to extend further credit, they will find rising asset prices and incomes justify their ability.
Unfortunately, this all requires an unprecedented amount of control to ‘manage’ something like smoothly . It means access to all factors of monetary circulation have to be controlled, which translates into something like total rationing by an outside agency, the CB or government. Otherwise you end up with the crack up, interests so high due to currency devaluation that they are unworkable, complete chaos in valuations. We already are partly experiencing that, but it is dumbed down and flattened by monetary and policy interventions.
Maybe that is what society wants, total pre-management of all facets of their lives, but of course, it will only be recognized economic necessities that are handled in this way, for the rest people will be free to do as they are told, something somewhat inevitable given that organizations of this nature are by necessity top heavy.
Then everyone will either wonder why the whole country stalls in its evolution, or why discontent, instead of being appeased becomes amplified to an extreme . The latter goes along the lines ‘ You forced or coerced us in this direction – now where is the promised answer, where is the meaning’ .
ps is that what von Mises calls “a crack-up boom?”
“Helicopter money isn’t manna falling from heaven, but would rip huge holes in central bank balance sheets,”
So now they are concerned about balance sheets, after they have made the rich even filthier richer, while making the rest poorer.