Boiling Frogs

Debt crisis: The solution is right here – but who dares to look at it?

September 25th, 2012  |  Published in Beyond the crisis, Crisis routine

Introducing a monetary dividend, ie. printing money and giving it directly to citizens through a periodical income is not a new idea, neither denuded from any rational economic arguments. Quite the contrary, actually. But will people just seriously consider the idea and claim for it to be done?

Sometimes I despair. How can the World be so blind and conservative towards radical ideas? Why can’t we just have a rational debate, look at the facts, identify the right problems and then consider the alternatives? On better days, I eventually find some courage to try again, explain things differently, and see what happens. Here we go…

Back in september 2009, yet Steve Keen predicted on his blog that the crisis would not be fixed with the approach of Obama’s government (emphasis mine):

Obama has been sold a pup by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.

Where are we now, in 2012?

Well, not only the US have been following the same ideology of rescuing banks endlessly and inefficiently, but this flawed logic has been imitated in Europe, again, again and again.

Put simple, the mistake consists in piling more debt onto the huge pile of debt, in attempt to stimulate the economy and reimbursing our debts.


This logic is flawed because more debt does not mean more creation of economic value, quite the contrary in certain circumstances. As Keen says, this does not work if the economy is not just suffering from a liquidity stress, but also from an overall over-indebtedness.

This over-indebtedness can be seen as a deep black financial hole : a huge amount of private and public debts that we are supposed to reimburse, but which does not match with the same amount of real economic value. In other words, a significant part of that debts are not worth anything.

Central banks and governments are trying to jump beyond the black hole, by acting with kid gloves towards the banks in a hope that they will lend again in the economy, and thus stimulate growth. But what if no one is willing to get more indebted? What if banks are lacking of solvent consumers? In this case, we are just paying the banks not to lend.

We are at a point where the amount of debt is so unsustainable that it creates global uncertainties, distrust, market failures and disequilibriums, and ultimately unemployment and poverty. The economy is thus paralyzed and any attempt to stimulate it with conventional methods is meant to fail. Worse, the more we try this way, the more painful the fall will be. It’s like mounting on a stepladder when you are about to fall from the cliff. What do they expect if not reaching the summit of pointlessness?

Bubbles must burst

This big ponzi scheme must be ended at some point. When a bubble bursts, this basically means that what we thought was valuable suddenly reveals not to be such. In this situation – that economists sometimes call a “balance sheet recession” – the best solution would be to make the investors pay the price of their losing bets.

After all, this is what capitalism is about: make good decisions and you’ll get rewarded; otherwise bear your losses.

But the thing is, the consequences of the massive debt write-downs required is so frightenning that no one is willing to put this option on the table. Not a single policymaker would take the responsibility for this. Only Iceland did, mainly because they had not much any other viable option though.

Artificial respiration

Elsewhere instead, central banks and governments are virtually holding the banks afloat, thus preventing the complete collapse of the financial system. The impact on the real economy however remains pretty inexistant because the money injected by central banks does not infiltrates the real economy, but get stucked between the privates banks and the central bank.

The quantitative easing by the Fed (or ECB) merely keeps the system afloat, without stimulating the real economy or even deleveraging much of it. What it does, however, is to create a big addiction from the banking sector, which cannot stand by itself because of a dysfunctioning interbank market. Should central banks withdraw their support, the system would collapse immediately.

On the longer term, this only keeps the black hole unrevealed, not without pain though. Indeed, the price for the quantitative easing is a massive risk transfert from private to public institutions, and a bump of some financial assets prices, which, even the Bank of England reckons, benefit to the richest.

If the massive debt write-down that should theoretically happen will not, what we should do then?

Just give us the money

Well, there are different basic solutions for a balance sheet recession. Either you accept to decrease the value of you assets (which policymakers won’t do as explained earlier), either you increase artificially your liabilities, to dilute smoothly the losses among society and monetize what you consider have more value than you thought. In other words: you print money (for real, not just QE).

The logic behind this second option is the following: instead of creating money and giving it to the banks, why not distributing it directly to the people ? Let’s say the central bank increases its monetary mass by a certain percentage (5% for instance) divide it by the number of citizens, transfers the cash into their bank accounts every month, and repeat it as long as it works. Simple as this.

Alternatively, we could do both distribute a monetary dividend and use money printing for repaying people’s mortgages at the same time (like Charles Eisenstein – among others – suggests).

This may sound crazy or utopian, or you might wonder: “If this is so simple, why don’t our policymakers just do like that?”

This is a question I am still wondering myself. It’s not like the idea is new, neither it is unknown from policymaker, neither it doesn’t have theoretical fundamentals, or just pragmatic advantages. I will detail all this, but first of all, let’s have a look at the several advantages of this proposal.

Not an absurd idea

Far from being absurd, the idea has several interesting features to consider. First of all, contrary to the ongoing QE plans, giving a monetary dividend to everyone would involve less moral hazard, since everyone would earn it, not just the bankers, debtors, or shareholders.

However, let’s be clear it would benefit most of all to the poorest. “How about inflation?” you may ask. For sure that would be a collateral consequence of this, but the dividend would still boost the income for the poorest more then those who have a lot of savings. In relative terms, the share of the monetary mass owned by the richest would actually be diluted to the benefit of the modests.

Not to mention, having a monthly additional income could strengthen the bargaining power of the workers. For the unemployed, the dividend would be an efficient and bureaucracy-free safety net. In times of crisis and when informal economy is on the rise, this would be more than welcome, don’t you think?

Of course,  this would also boost of aggregate demand, thus stimulate the economy and create employment. Moreover, the signal effect of such a measure could also be quite significant, restoring confidence in the economic outlooks, and thus strengthen the keynesian-style stimulus.

Last but not least, since this monetary injection would be debt-free, this would help deleveraging the big debt bubble. Households would be able to reimburse their mortgages more easily than now. As for the governments, this money would also ultimately end up in their fiscal income, while some inflation would also help them to repay their debts. At the same time, central banks would be able to withdraw gradually their extended support towards the banking system (new deposits in their liabilities would do the job pretty well).

So yes, just giving money to people would be a great help! But let’s go back for a moment to the origins of such an idea.

Not a new idea

Yet in the 1920s, Major Douglas initiated a movement claiming for a “social credit” system. Under this proposal, all the money in circulation would be created through the distribution of a citizens dividend, and not by banking loans.

In France, the theory of social credit has been recently modernized by Stéphane Laborde, author of the “Relative Money Theory“. In this book, he claims that money is nothing but a social agreement. And if it so, then there is no reason with money creation would go to the benefit of anyone, if not… everyone.

Also, his theory is based on the principle of relativity, according to which money should not be backed by any arbitrary value. This leads him to conclude that every citizen from any generation should be credited by the same share of money creation. Thus money creation would be done through the distribution of a monetary dividend whose amount would rely on the number of participants and life expectancy.

But not all the promoters of the idea are such radicals. Some are more pragmatics, like Keynes or Milton Friedman, the later with a famous parable called “The helicopter drop”:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1000 in bills from the sky, … Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

Friedman suggested that deflation could be fought using this method. He also championed the idea of a negative income tax, which basically consists in giving cash to the poor.

A rampant idea

Since then, and with help from the crisis, the idea has been periodically brought out of the shadow by a series of bloggers and economists. For instance, in the midst of the financial crisis in 2008, one could read this on the FT:

We need a legal and administrative framework to allow central banks print money and transfer it to households. This would be efficient, effective and would eliminate the deflation risk for good.

More recently, Steve Waldmann’s had a great post in which he argued:

rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public. During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle.

The later proposal was applauded by Peter Frase, while Mathew Yglesias added:

There’s no particular reason why monetary policy has to be conducted through interactions between the central bank and a banking system. Or, rather, the reason it’s done this way is historical.

Earlier this year, one could read in the Financial Times an appeal addressed to Bernanke to “fire up the helicopters”. Here goes Samuel Brittan:

The object of the helicopter drop would be to boost spending for those who pick up the money, who should feel wealthier and not become more indebted. They should have every reason to spend. The more worried they became about helicopter money, the faster they would spend it.

Or this striking post by Anatole Kaletsky on his reuters’s blog:

Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective.

And further:

One such radical measure is too controversial for any policymaker to mention publicly, although some have discussed it in private.

Back in november 2011, you could also read in this blog post that giving directly money to people was an option considered at the BoE (but rejected).

Similarities with other theories

Another point to have in mind is that the fundamentals justifications behind this proposal are not that far from others proposals and theories. At least it shares some common views with market monetarists, the neo-chartalists (MMT), and in some regards with the austrians. Actually, I see this proposal as a good compromise between the three positions…

Like the market monetarists who argues that the central bank should target a certain level of nominative growth (NGDP target) in order to fight excessive business cycles, the idea of distributing direct cash to people is obviously meant to stabilize confidence and boost aggregate demand when required, at the expense of inflation, which they consider not being a major threat (they prefer nominal growth with inflation rather than an abrupt recession alone).

As for the chartalists however, this proposal is meant to be pragmatic: why waiting for the private banks to do stimulate the economy when the central bank (or a government) can do the job by itself? Actually, supporters of a monetary dividend often critic the limits of fractional reserve banking.

Furthermore, as for some austrians libertarians, this proposal is meant for increasing individual freedoms and respect equality of treatment between citizens. Yes, this kind of monetary policy would be quite massive, but ultimately, the consequences of it would mainly stand on the shoulders on every individuals, not just on a board of central bankers or a crappy government. How people will spend the money will ultimately define where money creation is affected. Which is, by the way, very similar to the theory of basic income (as you know, I’m a big fan of this idea as well…).

Evidences are not enough

Despite of all these evidences that “there must be something true in there”, I must concede: the idea is far from mainstream. I have seen the idea quite often mentioned in blogs comments, but very rarely an economist or a famous blogger would publicly give is take on it.

I don’t think this is a matter of economic arguments. Rather, the problem with the idea is that it looks “too good to be true”, or that there were “no easy solution”. Like this post illustrates pretty well:

It’s no secret; it’s just that the idea is so counter-intuitive that it refuses to sink into the public consciousness. Of course, if you started to give the cash directly to the people, then they might finally understand that our entire economic system runs on funny money. And who knows what would happen then?

Behind this problem stands another one. For decades, we have been told the poor were (at least) half responsible for their poor conditions, if not even guilty. And by the way, they are happy with, since they get State benefits… According to this ideology, then giving money directly to people without conditions, is obviously blasphemous. And thus followed all these means-tested anti-poverty programs (which fail most of the time), workfare, and other lame moralistic arguments against solidarity. Definitely, this headline nails it:

We can put and end to poverty, but are you willing to trust the poor?

I’m afraid not many people do nowadays. We have to change our way of thinking to come up with this.

Then comes the political reason why it won’t be easy to have this solution implemented: it requires a lot of courage from our policymakers and economists to admit we should do this. Doing it would be like reckoning that what we have been doing and saying so far was errr… bullshit. Where is the modest and wise human being who would do that? He doesn’t exist, I’m afraid.

Not many options remain. Either we wait for a superman to show up and do it, either we rise up, spread the word, take the streets, and ultimately give no other choice to our policymakers but to listen to our demand. A long way to go… but isn’t it worth?

PS: what this solution would look like for Greece? See this paper.

PaternitéPas d'utilisation commerciale tim ellis

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