Sometimes fiscal policy is like the weather: Everyone talks about it but nobody ever does anything about it.
It's certainly been a big topic of conversation here at the Milken Institute Global Conference. For the most part, even the talk has been a bit uninspiring. Nearly every panel over the past three days has featured someone who complains about dysfunction in Washington being a drag on the economy.
Most panelists are more or less in agreement with the folks who Paul Krugman calls "The Very Serious People": They want a grand agreement for medium term deficit reduction, on the often unarticulated grounds that future deficits are somehow traveling back in time and slowing our economy now.
In this context, the Wednesday morning presentation by Dan Arbess, a partner at Perella Weinberg and chief investment officer at PWP Xerion Funds, was startling because of how deeply it broke from the standard narrative.
We've been wrong to assume that the economic crisis is over, Arbess said. We stopped the crisis from reaching Great Depression levels through drastic fiscal actions such as TARP and the Obama administration's fiscal stimulus. But almost as suddenly as we started, we stopped these efforts, which Arbess says has resulted in us being "mired down" for the past four years.
What's kept us afloat has been monetary policy, but that's now reaching its limits, according to Arbess. The threat of deflation is once again rearing its head.
"The persistent risk in our economy is deflation not inflation," Arbess said.
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His proposed solution is that we start directly funding government expenditures through the central bank. That is, we should stop relying on taxes or further debt issuances to finance government—or at least reduce our reliance on taxes and bonds. Just let the Federal Reserve pay the government's bills by exercising its money creation powers.
Although Arbess didn't say so directly, he's clearly been influenced by a groundbreaking February speech of Adair Turner, the chairman of the British Financial Services Authority. Turner termed the policy of using newly created money to directly finance tax cuts and new spending "Overt Monetary Financing" and argued that the inflationary effects of such a policy were misplaced in the context of clear targets and an independent central bank.
Arbess pointed out that this idea isn't really all that new. It's been around since Milton Friedman argued in a 1948 paper that all government deficits should be financed with noninterest bearing fiat money. Ben Bernanke, chairman of the Federal Reserve, argued explicitly in 2003 that Japan should consider "a tax cut … in effect financed by money creation." It was this idea—which people termed "helicopter money"—that got him the nickname Helicopter Ben.
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Of course, any talk of direct central bank financing of government triggers fears of hyper-inflation. Arbess argues that the key to avoiding inflation would be to have clearly stated growth and inflation targets. When these were reached or exceeded, the Fed would end or taper off the Overt Monetary Financing policy.
How much more stimulating would OMF be than quantitative easing? Consider the thought experiment proposed by Anatole Kaletsky:
At present the Fed prints $85 billion of new money monthly and distributes it to banks and Wall Street investors by buying government bonds. And the Fed has promised to continue this monthly "quantitative easing" until such time as unemployment drops and is clearly and sustainably declining to more normal levels. Now suppose instead that the Fed divided its $85 billion monthly money production into 300 million checks of $283 each and sent these to every man, woman and child in America. Suppose, moreover, that the Fed promised to keep sending out these checks, worth more than $1,000 a month for a four-person household, until the United States reached its unemployment target—and the Fed chairman added that he would increase the checks to $1,500 or $2,000 a month for that household if $1,000 monthly proved insufficient. There can be little doubt that this deluge of free money would stimulate consumer spending and revive employment—and no doubt that it would be infinitely more effective than distributing money to bond investors and banks through QE.
For a very old idea, it's still a radical notion. Arbess gets credit as the first hedge fund manager to raise it in such a public way.
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