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Post by Antti Jokinen on Sept 25, 2018 11:12:52 GMT
In a recent blog post, Eric Lonergan links to a paper by two Czech authors, Hampl and Havranek, who work for the Czech National Bank. In the paper, they discuss "helicopter money" (which they call "direct support of consumption") and the related constraints. It seems obvious to me that the amount of book equity (what the authors call 'capital'; also known as shareholders' capital) doesn't form any kind of real constraint in the case of central banks. In this I agree with Hampl and Havranek. This is because central banks operate, de facto, with unlimited liability borne by the government. This means that should the book equity become negative, it in effect becomes government debt. What I cannot understand is that Hampl and Havranek seem to suggest that debiting * shareholders' capital as part of direct support of consumption, which is a special program, would not require permission from the Treasury (representing the government, and the people). Here's what they say (p. 15): It is almost as if they think of 'capital' as the bank's, and not the shareholder's (in most cases the government) capital, and thus the operation would be strictly monetary, not fiscal, in character. In this they are wrong. No bank has capital. The bank is not its shareholders (nor do the latter, strictly speaking, even own the bank; see John Kay). The operation is fiscal. This is because debiting the capital account affects directly the government's financial position, just like a debit on the Treasury's checking account ('Consolidated Fund' in the UK, 'Treasury General Account' in the U.S.) at the central bank does. The Treasury has of course pre-approved regular costs related to running the central bank, and in the UK, which I think is the clearest example to have in mind, this happens trough Treasury approval of the Bank of England budget (for more information, see this memo). But this pre-approval would never include special programs like the one suggested by Hampl and Havranek, where the outcome is more or less the same as it was if the government decided to give a tax rebate to all citizens. Whether we debit the Treasury's checking account or the Treasury's capital in the central bank, the outcome is the same: government's financial position weakens and citizens' financial positions strengthen. There seems to be a lot of confusion when it comes to central bank accounting. Hampl and Havranek are by all means not the only experts who seem to get things wrong. "Helicopter money" is a good test, because in order to understand it, you really need to understand accounting. For more on this topic, see the comments below Lonergan's post. * This goes usually through the P&L, so that crediting citizens' accounts in "direct support of consumption" would appear as a cost in the P&L, reducing shareholders' capital. Edit: You find the idea in Hampl-Havranek here in a more readable form (JP linked to this on Twitter earlier this year - thanks, JP!): www.bis.org/review/r180308a.htm
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Post by oliver on Sept 25, 2018 12:57:49 GMT
In a recent blog post, Eric Lonergan links to a paper by two Czech authors, Hampl and Havranek, who work for the Czech National Bank. In the paper, they discuss "helicopter money" (which they call "direct support of consumption") and the related constraints. (...) Let me be the first to agree with you. It couldn't be any other way.
You say:
What's the difference between government and the public? Surely, 'government' does not refer to government employees?
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Post by Antti Jokinen on Sept 25, 2018 19:03:38 GMT
What's the difference between government and the public? Surely, 'government' does not refer to government employees?
I edited that part now, thanks. By public's financial position I meant the private financial positions of people. 'Public' is a misleading word, as it carries at least two different meanings in economics: in 'currency held by the public' it is used as I meant it here, whereas 'public debt' is debt incurred by the government, as a representative of the people, on behalf of the people.
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Post by JP (admin) on Sept 26, 2018 14:07:28 GMT
In a recent blog post, Eric Lonergan links to a paper by two Czech authors, Hampl and Havranek, who work for the Czech National Bank. In the paper, they discuss "helicopter money" (which they call "direct support of consumption") and the related constraints. It seems obvious to me that the amount of book equity (what the authors call 'capital'; also known as shareholders' capital) doesn't form any kind of real constraint in the case of central banks. In this I agree with Hampl and Havranek. This is because central banks operate, de facto, with unlimited liability borne by the government. This means that should the book equity become negative, it in effect becomes government debt. Yeah, I mostly agree. But what if you've got an anti-technocratic populist in power who hates central bankers and doesn't want to bear the central bank's debt? What I cannot understand is that Hampl and Havranek seem to suggest that debiting* shareholders' capital as part of direct support of consumption, which is a special program, would not require permission from the Treasury (representing the government, and the people). I think I agree that large transfers by the central bank directly to the public probably need permission from the Treasury. What about transfers to bankers, though? When central banks started paying interest on reserves to banks, did they have to get the Treasury to sign off? When the Fed brought out it's ON RRP program and started paying interest to money market mutual funds, it didn't have to get any special permission... it managed to use wording in the the existing Federal Reserve Act to justify the move.
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Post by Roger Sparks on Sept 26, 2018 17:37:49 GMT
It is clear to me that with money in my account, I can do things that are not possible without-money. It follows that I like getting money, even if it is 'helicopter money' from the central bank. Receiving 'helicopter money' is very similar to receiving a gift certificate for my birthday.
Of course I agree with you, Antti, that central banks have no capital (meaning money) of their own to give out. Central banks need to get authorization from their regulator, who would be governmental. Once permission is granted, the remaining decisions are how to accomplish the distribution task and who should receive the benefits.
To focus on distribution details is to beg the question of where the distributed capital actually comes from. This capital can not come from people lacking capital. Period!
So where does the money come from?
I think that is what Antti is trying to uncover.
Mainstream economics does not seem to have a solution. We need to go heterodox.
One very unusual view would be to consider government as if it was a shopkeeper owning the entire United States economy. This shopkeeper even owns the central bank. As owner of the shop (a shop owning all of USA), the shopkeeper can issue gift certificates if he feels consumption is under-performing. This is identical to a local store offering a limited store-wide gift certificate to anyone who walks through the door.
So, is money just a national gift certificate. I have argued to that effect.
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Post by oliver on Sept 27, 2018 7:51:58 GMT
Yeah, I mostly agree. But what if you've got an anti-technocratic populist in power who hates central bankers and doesn't want to bear the central bank's debt? What if the central bank never published any numbers and everyone was left to guess whether equity was porisitve or negative? But does that change anything about the general accounting? Is the debt accumulated not public in the same sense as government expenditure? hat if government never published its numbers? What reason, other than wishing it might be so, is there to assume that the CB is somehow outside of the accounting universe? So there may be wiggle room within the existing legal framework, but does that change anything fundamental? And has equity moved into negative territory because of it? Antti may disagree with me here, but if we imagine a world in which central bankers were officially given all discretion to do with their balance sheet as they wished without having to consult with the treasury, that should be interpreted as them being officially entrusted with fiscal powers, rather than an act of liberating monetary policy. Monetary policy is monetary precisely because it is confined to balance sheet operations within certain limits, as opposed to just being that which central bankers do. We could mandate central bankers to hold a beauty pageant once a year. That would not make it monetary policy. And even if we decided to redefine the lines between monetary and fiscal policy, negative cb equity would still be public debt.
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Post by Antti Jokinen on Sept 27, 2018 15:52:15 GMT
JP, in what way would negative equity be "central bank's debt"? In a limited liability company you would need to -- after wiping out the equity -- touch the positions of other creditors. Negative equity itself, to me, suggests extended liability on the shareholders' side. I avoid saying that the CB itself has debt, because Lonergan, and most monetarists, quite reasonably deny that the CB owes something to someone. I can live with that, as you might remember from our previous discussions.
To a limited extent the Fed, for example, could repair its balance sheet by selling gold which it holds at below market price in its books (although it might need a permission from the Treasury for even this).
I think the Fed examples you mention (IOR, etc) are stuff that banks, including central banks, do. Paying interest to depositors cannot be considered that special, can it? What would be really special would be Bank of America crediting all its customers' checking accounts with $1,000 and booking that as an expense. The shareholders would probably not like that. Someone might protest now and say that central banks are entirely different, but in this particular case, are they?
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Post by JP (admin) on Sept 28, 2018 1:41:06 GMT
What if the central bank never published any numbers and everyone was left to guess whether equity was porisitve or negative? But does that change anything about the general accounting? Is the debt accumulated not public in the same sense as government expenditure? hat if government never published its numbers? What reason, other than wishing it might be so, is there to assume that the CB is somehow outside of the accounting universe? No, I don't think that changes the general accounting. But I don't want to speak for Hampl. So there may be wiggle room within the existing legal framework, but does that change anything fundamental? And has equity moved into negative territory because of it? Antti may disagree with me here, but if we imagine a world in which central bankers were officially given all discretion to do with their balance sheet as they wished without having to consult with the treasury, that should be interpreted as them being officially entrusted with fiscal powers, rather than an act of liberating monetary policy. Monetary policy is monetary precisely because it is confined to balance sheet operations within certain limits, as opposed to just being that which central bankers do. We could mandate central bankers to hold a beauty pageant once a year. That would not make it monetary policy. And even if we decided to redefine the lines between monetary and fiscal policy, negative cb equity would still be public debt. Yep, I agree. I was only pointing out that the line between the two can often times be a fuzzy one.
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Post by JP (admin) on Sept 28, 2018 2:00:55 GMT
JP, in what way would negative equity be "central bank's debt"? In a limited liability company you would need to -- after wiping out the equity -- touch the positions of other creditors. Negative equity itself, to me, suggests extended liability on the shareholders' side. I avoid saying that the CB itself has debt, because Lonergan, and most monetarists, quite reasonably deny that the CB owes something to someone. I can live with that, as you might remember from our previous discussions. Maybe my sentence was poorly chosen, let me try again. Maybe you've got an anti-technocratic populist in power who hates central bankers. It runs into operating problems and its capital goes negative. But the executive refuses to recapitalize the central bank in order to return it to health. I suppose I was only making the point that even if negative equity becomes government debt, it's possible that this debt goes unserviced. It's probably not a very important point. I think the Fed examples you mention (IOR, etc) are stuff that banks, including central banks, do. Paying interest to depositors cannot be considered that special, can it? What would be really special would be Bank of America crediting all its customers' checking accounts with $1,000 and booking that as an expense. The shareholders would probably not like that. Someone might protest now and say that central banks are entirely different, but in this particular case, are they? Paying interest on reserves has attracted a lot of attention (in the US) because it is viewed in some quarters as a reward to banks. I believe Lonegran has referred to exemptions from negative interest rates in Japan as a "first step along the journey towards helicopter money." But sure, there is probably some sort of categorical difference to be made between paying interest on reserves and writing every citizen a $1000 check.
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Post by Antti Jokinen on Oct 3, 2018 5:53:31 GMT
JP said: "Maybe my sentence was poorly chosen, let me try again. Maybe you've got an anti-technocratic populist in power who hates central bankers. It runs into operating problems and its capital goes negative. But the executive refuses to recapitalize the central bank in order to return it to health. I suppose I was only making the point that even if negative equity becomes government debt, it's possible that this debt goes unserviced. It's probably not a very important point."
I think it's a point well worth discussing. Here's how I view it.
If the government is, explicitly or implicitly, liable to recapitalize the CB, then negative equity itself is government debt. (Notice that a CB could be, and many times has been, recapitalized through the government issuing a new bond and selling it to the CB, so it's anyway a wash.) Depending on the strength of the society, the central bank can be perfectly healthy even if it operates with negative equity for years on end. As I said, negative equity is comparable to a government bond on the CB balance sheet. Sure, it's like a perpetual bond, so it can go "unserviced" for a long time. But a debt is a debt, even if its repayment hangs on the honor of the debtor (like, for instance, many debts between friends do). (Remember our discussions on colonial currency: This is not government's debt to the CB. This is public debt which the CB keeps a record of.)
Now to the populist. Should she resist recapitalization, that would not mean she denies the debt, as I explained above. Even if she, for some weird reason, would deny the debt itself, it would have little effect if people assume that the next executive will acknowledge the debt (Swiss dinars come to mind). What's the alternative? Breaking the buck, right? And if hell got loose when a money market fund did it in 2008, we don't want to find out what happens when a CB does it.
Generally, by making bad investments, the CB can put the government in debt (the main reason why the the Swiss National Bank had to give up on its CHF/EUR ceiling?). And putting the government in debt sounds pretty fiscal to me. As you said to Oliver, the line between monetary and fiscal is blurry.
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Post by Antti Jokinen on Oct 4, 2018 7:04:42 GMT
Oliver and JP,
Oliver said: "Antti may disagree with me here, but if we imagine a world in which central bankers were officially given all discretion to do with their balance sheet as they wished without having to consult with the treasury, that should be interpreted as them being officially entrusted with fiscal powers, rather than an act of liberating monetary policy. Monetary policy is monetary precisely because it is confined to balance sheet operations within certain limits, as opposed to just being that which central bankers do. We could mandate central bankers to hold a beauty pageant once a year. That would not make it monetary policy. And even if we decided to redefine the lines between monetary and fiscal policy, negative cb equity would still be public debt."
You put it better than I could. I fully agree.
I think we could, to keep on blurring the line, also talk about monetary policy with (direct and indirect) fiscal effects. Monetary policy decisions and actions, such as conventional (lending) rate setting, OMO and IOR, all have fiscal effects. These effects usually come in the form of changes in government revenue. For instance, an increase in IOR paid reduces the CB profit, which reduces government revenue through a smaller dividend (direct effect). Or lowered lending rates boost economic activity and increase tax revenue (indirect effect).
Notwithstanding its side effects, monetary policy in a modern central bank is all about interest rates (in the wider economy). I think here lies the categorical difference JP was after. 'Direct support of consumption' is *not* about interest rates.
As long as the CB doesn't need to be recapitalized, 'direct support of consumption' shows up not as a government expenditure but as a reduction in government revenue. The negative fiscal effect is of course the same, whether we talk about higher expenditure or lower revenue. On the other side, there's a positive effect on citizens' account balances.
Compare this to the effects of a government decision to lower individual income taxes: a positive effect on taxpayers' account balances and a reduction in government revenue.
Or a government decision to transfer $1,000 to all citizens: a positive effect on citizens' account balances and an increase in government expenditure.
When we look at these comparisons, it becomes obvious that 'direct support of consumption' is in effect a fiscal operation.
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