Posted on 2020-01-18 18:20:00
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The first problem is there’s not much of a multiplier at this stage of the U.S. expansion. The current expansion is already the longest in U.S. history. It’s also been the weakest expansion in history, but an expansion nonetheless. The multiplier effect of government spending is strongest at the beginning of an expansion when the economy has more spare capacity in labor and capital.
At this point, the actual multiplier is probably less than one. For every dollar of government spending, the economy might only get $0.90 of added GDP; not the best use of borrowed money.
The second problem with helicopter money is there is no assurance that citizens will actually spend the money the government is pushing into the economy. They are just as likely to pay down debt or save any additional income. This is the classic “liquidity trap.” This propensity to save rather than spend is a behavioral issue not easily affected by monetary or fiscal policy.
Finally, there is an invisible but real confidence boundary on the Fed’s balance sheet. After printing $4 trillion in response to the last financial crisis, how much more can the Fed print without risking confidence in the dollar itself?
Quantitative tightening brought the balance sheet back down to $3.8 trillion. But now it’s over $4 trillion again, as the Fed has added hundreds of billions to its balance sheet since September, when it starting shoring up short-term money markets. It’s basically been “QE-lite.”
Modern monetary theorists and neo-Keynesians say there is no limit on Fed printing, yet history says otherwise.
Importantly, with so much U.S. government debt in foreign hands, a simple decision by foreign countries to become net sellers of U.S. Treasuries is enough to cause interest rates to rise thus slowing economic growth and increasing U.S. deficits at the same time.
If such net selling accelerates, it could lead to a debt-deficit death spiral and a U.S. sovereign debt crisis of the type that hit Greece and the Eurozone periphery in recent years.
In short, helicopter money could have far less potency and far greater unintended negative consequences than its supporters expect...