Monetary Financing of Government Spending (Quantitative Easing,Helicopter Money)

Monetary Financing of Government Spending by way of Quantitative Easing, helicopter money, sovereign debt neutralisation, and more

Since the aftermath of the 2008/12 crisis there has been talk of monetary financing, which is short for central-bank funding of government expenditure, including central-bank refinancing of government debt. In lieu of conventional Quantitative Easing for finance, i.e. central-bank purchases of sovereign bonds and other securities from banks and financial investors, a central bank should transfer comparable amounts of money directly to the government. Extra government spending funded this way would immediately benefit general purchasing power and real-economic investment.

Due to the coincidence of several crisis developments (the Covid pandemic, climate crisis, new geopolitical confrontation, Ukraine war, supply shortages, soaring inflation and interest rate turnaround), compensatory government spending has once again expanded in leaps and bounds, as has government debt. Thus the central bank policy of loose money has entered another phase.

Here are two papers on the subject:
a 6 pages paper Government Debt and Monetary Financing (2023) or print as a PDF >

a 14 pages paper on Monetary Financing of Government Spending by way of Quantitative Easing, helicopter money, Quantitative Boosting, or similar (2021) or print as a PDF >

Moreover: Central Bank Digital Currency (CBDC) and Quantitative Easing (QE)
4 pages on how to make good use of the large overhang in central bank reserves. Input to the 2020 monetary reform conference org. by the American Monetary Institute and the Alliance for Just Money.

Stanislav Jourdan from Positive Money Europe Brussels fears a return of self-defeating austerity policies. Nevertheless, he does not consider a debt cut of European government bonds held by the ECB to be urgent. Nor does he contemplate a deep-freeze of these sovereign bonds by converting them into zero-coupon perpetual consols. Instead, he wants to lift the ban on the ECB on contributing directly to financing government expenditure (as stipulated in Art. 123(1) TFEU).

Of course, one can and should do both: deep-freeze government debt and rewrite Art 123 TFEU - whereas cancelling debt on a central-bank balance sheet in times of zero and negative interest isn’t urgent indeed and, besides, cannot neatly be done without extinguishing related central-bank liabilities too, that is, central-bank money on bank and treasury accounts. As fas as money is created by way of extending monetary credit, redeeming such credit reduces the liquid money supply. Who would want to be that silly? >>
ECB debt cancellation: A last resort, not a first-best strategy.

• The NGO Positive Money developed the approach of monetary financing as a debt-freeze substitute for conventional debt-funded Keynesian deficit spending. The proposal, prepared by Andrew Jackson, can be found in the brochure titled
> Sovereign Money from page 16 onwards. 
In the meantime, Positive Money carried out a campaign > QE for People in the eurozone, more generally also referred to as > Public Money for the Public.
E. Lonergan and St. Jourdan of Positive Money Europe have written a Policy Brief > Citizens' Monetary Dividend. Upgrading the ECB's Toolkit, Sep 2016. 

Deputy Governor of the Swedish Riksbank, Cecilia Skingsley, says > Helicopter money should be considered

Romain Baeriswyl of the Swiss National Bank makes > The Case for the Separation of Money and Credit by monetary lump-sum transfers from the central bank directly to citizens (in fact a citizens dividend). This is thought to be an effective instrument of CPI targeting.

Adair Turner, last chairman of the UK Financial Services Authority, adopted the idea as overt money finance. In his opinion, helicopter money is no more risky than present QE > Printing money to fund deficit is the fastest way to raise rates, Financial Times, 10 Nov 2014.

Frank van Lerven has gathered a number of impressive case studies when government-issued money decisively contributed to overcoming deep-seated recessions and depressions. He has also written  > A Guide to Public Money Creation: Outlining the Alternatives to Quantitative Easing, Positive Money, 28 April 2016.

As conventional Quantitative Easing is largely ineffective in real economic terms and comes with undesired financial side effects (asset inflation and worsening of unequal distribution of wealth), helicopter money is an alternative instrument of economic policy and would undoubtedly be beneficial to a degree, particularly in countries where there is a high level of idle capacities and a serious lack of effective demand.

On the other hand, the various ways of monetary financing have been presented as a first step towards sovereign money reform, to which, however, they contribute only marginally. The problem-ridden and crisis-prone system of fractional reserve banking continues to exist such as it is. Budgetary and fiscal government policies, too, remain basically unchanged, including the existing high levels of indebtedness. Simply, deficit spending on the basis of interest-bearing bank credit is replaced with deficit spending on the basis of central bank credit free of interest. Within the present frame of central bank accountancy there is no way of issuing truly debt-free money. Seen like this, helicopter money is not really such a thrilling alternative to conventional sovereign debt under the present conditions of zero or even negative interest due to financial repression.

In order to implement helicopter money, the central bank would need to be given the option of making direct contributions to the government budget. According to EU and US law such transactions are prohibited today, so that this strange prohibition of the sovereign from creating sovereign money on own account would need to be repealed or specified. 

Whether this would mean blurring the boundaries between monetary and fiscal policy is controversial. Basically, yes; seen in closer detail, not necessarily – if and as long as the central bank, as an independent and impartial state body, creates the money on strictly monetary grounds, irrespective of the wants of the Cabinet and the Parliament.

In the United States – as a different, but comparable approach – there is a tradition, even though interrupted, of Treasury-issued money in addition and in parallel to bankmoney and Federal Reserve notes. Referring to the 'greenbacks', the US dollar Treasury notes of the Civil War, there was the greenback movement in the late 19th century in support of US Treasury money.
The Global Monetary Forum wants to revive the option of US treasury greenbacks.

Prohibition of monetary financing of govern­ment spending under Article 123 TFEU. Central banks between monetary sovereignty and bankmoney dominance

Article 123 (1) of the Treaty on the Functioning of the European Union (TFEU), known as the Lisbon Treaty, prohibits the European Central Bank and the national central banks in the Eurosystem from contributing to the financing of government spending by lending directly to the treasuries or absorbing directly from them sovereign bonds. Ostensibly, this prohibition is meant to prevent government 'money printing' and inflation. In reality, the opposite is happening. The ban actually serves other interests and should be repealed.

Read more >      or print the paper as a PDF >

Exceptional times require exceptional measures to be taken.
Positive Money Europe calls for Helicopter Money as a Response to the Covid-19 Crisis

• Economists Willem Buiter and Sony Kapoor call for giant amounts of helicopter-money infusions into the real economy, wanting policymakers to move fast and break taboos, voxeu.org, 6 Apr 20.

• Tim Di Muzio on Covid‐19 Capitalism, Neoliberal Debt & the Need for Sovereign Money

• Edgar Wortmann, Ons Geld Netherlands, thinks of National Emergency Euros in the form of euro notes of ultra-high value (‘Titans’) for wholesale transactions among governments and banks. IMMR Blog, 29 March 20.
The idea of a 'trillion dollar coin' emerged in the US in 2011 during the debt-ceiling budget crisis, referring to the Treasury's undisputed traditional right to issue coins. Central banks have the undisputed right to issue notes and digital reserves or tokens.
Art. 123 TFEU - prohibiting sovereign money creation to the sole benefit of bankmoney creation - is overdue for revision.

• 35 economists from various countries make the case for injecting fresh money directly into the real economy > A post-Brexit economic policy reset, The Guardian, 3 Aug 2016. - Among the 35 is Lord Robert Skidelsky who explains why> Helicopter money is back in the air, The Guardian, 22 Sep 2016. 

• 20 economists plead for > Better ways to boost eurozone economy and employment in the Financial Times of March 26, 2015.

• Martin Wolf says "I fail to see any moral force to the idea that fiat money should only promote private spending." Read full article >  The Case for Helicopter Money, Financial Times, 12 Feb 2013.

• Willem Buiter, chief economist of Citigroup, calls for > EU and China to use helicopter money, Epoch Times, 15 July 2016.

• In a paper in the real-world economics review, no.68, 2014, Trond Andresen has conceived of > The Central Bank with an Expanded Role in a purely electronic monetary system which might help to make the transition from bankmoney to sovereign money.

In Canada, direct financing of public expenditure by the Bank of Canada existed from 1936 through to the early 1970s. Under the conditions of that time, in particular low levels of indebtedness and a huge, widely untapped productive potential of the country, that experience was particularly beneficial, as explained in the study by  
Josh Ryan-Collins, A Case Study of the Canadian Economy, 1935-75, Levy Economics Institute of Bard College.

Lawsuit against the Bank of Canada for failure to directly extend interest-free credit to the government

On 26 Jan 2015 three judges of the Canadian Federal Court of Appeal confirmed a judgment of the previous year according to which the Bank of Canada is entitled and in fact ought to contribute to funding Canadian government expenditure by way of direct interest-free credit to the government.   

The renewed judgment was initiated by an action of the NGO COMER against the Bank of Canada, and a counter-action of the Canadian government against COMER (Comité sur la réforme économique et monétaire). COMER dates back to the Social Credit movement of the 1920-40s. From 1935 through to 1974 the Bank of Canada (an independent state body since 1938) had contributed to the government budget by directly crediting the government account free of interest. The money served to fund extensive investment in the infrastructure of the country, including education and vocational training, as well as to cover the costs of the Second World War. There was no inflation except the usual and short-time post-war inflation due to peacetime conversion as well as inflation in the 1970s – as was the case everywhere at the time.

> The Journal of COMER, issue Jan-Feb 2015  
> COMER, le collectif qui fait trembler la banque du Canada. 
> The Case to 'Reinstate' the Bank of Canada, by M. Oliver Heydorn

In the meantime, the Supreme Court of Canada dealt with the matter - and has rejected the complaint on the grounds that it does not see itself as the right body to tell the government or the Bank of Canada how to exercise monetary policy.

> COMER Case against Bank if Canada reaches its end

So, that road of taking legal action has not led any further. What remains, however, is political action to be supported by a paradigm shift from bankmoney to sovereign money among experts and the public. Given the poor legal foundations of the present bankmoney regime, informed political action has priority anyway.