From: Asia Times Online
By Ellen Brown
Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn't been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real "helicopter drop" that puts money into the pockets of consumers and businesses has not yet been tried. Why not?
When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve. He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters.
Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn't been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real "helicopter drop" that puts money into the pockets of consumers and businesses has not yet been tried. Why not?
When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve. He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters.
"The US government has a technology, called a printing press (or,
today, its electronic equivalent)," he said, "that allows it to produce
as many US dollars as it wishes at essentially no cost."
Later in the speech he discussed "a money-financed tax cut", which he said was "essentially equivalent to Milton Friedman's famous 'helicopter drop' of money". Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.
It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of "bank credit" created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.
But if debt deflation is so easy to fix, then why have the Fed's massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?
On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.
That is the technical answer, but the motive behind it may be something deeper.
An asset swap is not a helicopter drop
As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there. Except for the small amount of "vault cash" available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank.
According to Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:
QE as currently practiced is simply an asset swap. The central bank swaps newly created dollars for toxic assets clogging the balance sheets of commercial banks. This ploy keeps the banks from going bankrupt, but it does nothing for the balance sheets of federal or local governments, consumers, or businesses.
Central bank ignorance or intentional sabotage?
That brings us to the motive. Twenty years is a long time to repeat a policy that isn't working.
UK Professor Richard Werner invented the term quantitative easing when he was advising the Japanese in the 1990s. He says he had something quite different in mind from the current practice. He intended for QE to increase the credit available to the real economy. Today, he says: MORE
Later in the speech he discussed "a money-financed tax cut", which he said was "essentially equivalent to Milton Friedman's famous 'helicopter drop' of money". Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.
It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of "bank credit" created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.
But if debt deflation is so easy to fix, then why have the Fed's massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?
On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.
That is the technical answer, but the motive behind it may be something deeper.
An asset swap is not a helicopter drop
As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there. Except for the small amount of "vault cash" available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank.
According to Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:
[B]anks do not lend "reserves"... Whether commercial banks let the reserves they have acquired through QE sit "idle" or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same. [1]This point is also stressed in Modern Monetary Theory. As explained in the paper by Professor Scott Fullwiler:
Banks can't "do" anything with all the extra reserve balances. Loans create deposits - reserve balances don't finance lending or add any "fuel" to the economy. Banks don't lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its... interest rate target. [2]Reserves are used simply to clear checks between banks. They move from one reserve account to another, but the total money in bank reserve accounts remains unchanged. Banks can lend their reserves to each other, but they cannot lend them to us.
QE as currently practiced is simply an asset swap. The central bank swaps newly created dollars for toxic assets clogging the balance sheets of commercial banks. This ploy keeps the banks from going bankrupt, but it does nothing for the balance sheets of federal or local governments, consumers, or businesses.
Central bank ignorance or intentional sabotage?
That brings us to the motive. Twenty years is a long time to repeat a policy that isn't working.
UK Professor Richard Werner invented the term quantitative easing when he was advising the Japanese in the 1990s. He says he had something quite different in mind from the current practice. He intended for QE to increase the credit available to the real economy. Today, he says: MORE
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