QE and monetary finance

QE is a unconventional monetary policy, it mostly buys long dated government bonds to push down long term yields.

Monetary finance (or helicopter money, as coined by Milton Friedman), is a way that central bank directly credits government account, free of interest.

Monetary finance seems better than QE. Why the Fed do not and could not use it?

Effect is same at the end of day and QE is more effective, imo, because it directly stimulates not only Gov sector than intermediaries as well. Also there are other tools avail to Central bankers.

QE enlarge the balance sheet of Fed. And Fed needs to reverse it. Helipcopter money does not need to be reversed. So helicopter money is better

No it is not BS enlargement. Money for Bonds. Thus, Paper for paper, Asset 2 Asset. FED prints money and money is FIAT, imo.

definitely not the same effect. i think helicopter money is far more dangerous as i imagine its far more inflationary.

in qe, you use cash to buy long term bonds. so what you spend is backed by assets holding the value of whatever you use(granted the asset prices are slightly manipulated).

in helicopter money, you use cash and there is nothing backing it. so the value of the cash in circulation will go down much further.

Both interventions can be sterilized by additional actions.

Both qe and helicopter money will enlarge the money supply. Whether or not it will be inflationary , depends on velocity of money. If business hoards the cash, it will not be inflationary. Helicopter money is not backed by anything, it is like creating money out of thin air. If it is used discreetly, it will be useful to combat low interest rate. I understand the Fed and ECB are not allowed to use this method to create money due to some reason. QE is not in CFA curriculum. However, Since we just finished cfa exam, I try to dig out something to discuss :slight_smile:

QE = no politicians involved.

tax cuts, infrastructure investment = politicians

both are ‘helicopter money’ since the bonds eventually get torn up & become M0/M1.

history will judge QE as poor tool imo. FED should mandate increase qty/quality of physical assets backing debt. crowding out debt markets mispricing the quality is wrong.

What does fiscal policy have to do with the question, Simon?

Also - QE does grow the balance sheet. It’s not cash for bonds, it’s a credit to the bank’s reserve account at the Fed for bonds. There’s a distinction.

I forgot currency is a liability in CB’s BS not an asset.

QE was started 10yrs ago. and the tax cut is still coming…

Okay…? Tax cuts or infrastructure spending (expansionary fiscal policy) is neither “helicopter money” nor is it any type of monetary policy. The OP asked how the orange tastes and you started talking about apples. I don’t follow the reference.

Hi mixed oranges with apples. It’s hot in the city and that’s normal.

Tell me whether I was right that currency is a liability in Central Bank’s BS opposite to regular entity’s BS? This what you meant under credit to the bank’s reserve account?

QE doesn’t actually change the amount of currency in circulation (or held by the Fed). It increases the Fed’s liability (BoA’s reserve account for example) and increases the Fed’s asset (by acquiring a MBS held by BoA).

I believe there is no impact to the money supply unless BoA goes out and lends more as a result, which was in fact a constraint of QE that limited its effectiveness. Banks didn’t boost lending as was expected, which would have spurred the economy. They sat on the additional reserves. This is also why inflation remained low despite the hawks’ fears / warnings of rampant inflation.

I’m no expert but that’s my understanding of it, at a high level. The mechanics of QE are pretty involved.

American approach.

accountingnerd is right about the effects of lending on inflation. most of the things we consider money is actually credit. according to ray dalio, supply of money in 2013 is 50 trillion credit vs 3 trillion cash. and the level of credit is a function of confidence.

inflation occurs when the amount of money (really credit) increases faster than the level of productivity. deflation is vice versa. productivity is a constant growth. the level of credit though fluctutates a lot depending on confidence.


having said that, QE is monetary expansion and by definition does increase the money supply. helicopter money is fiscal expansion and has no effect on money supply in the long term. if the government spends money right now, yes they increase the supply temporarily, but they will obviously have to pay it back and tax people. so in the long run, there is no effect.

Yes, QE increase the M1 money supply. Imagine BofA sells 100m T-Bond to the Fed. In the balance sheet of BofA, 100m of securities is deducted, and 100m of reserve is added, that newly created 100m is part of M1 money supply.

Helicopter money has effect on money supply in the long run. The money is directly credited to government bank account, and it won’t be taken back.

Nope. If anything, the fed proved they were ahead of the curve there. BoE, ECB, and BoJ all QE’d. BoE and ECB were after Fed, not sure on BoJ. You COULD make a chicken/egg argument, that all central banks were FORCED into following it once the Fed did (race to the bottom), but reality is both the ECB and Fed were also concerned about shoring up financial institutions.

Why QE?

  • It buys actual assets, which I think is important.
  • It allows the fed to target what it wants. If I just create money, I may only hit the short term investing. My bidding up the long term of the curve, I drive those rates down. Those savings get passed on to borrowers (see mortgage lending, etc).
  • Have to remember, that the Fed was also trying to prop up housing and mortgages (IMO), hence they needed a tool do to that.
  • I also think QE helped solve the issue of banking capital requirements as well. By creating a tool to BUY from banks, we help change their assets without depressing prices.
  • While the balance sheet unwinding is a HUGE headache, there is probably something to the extent that the Fed can CONTROL their sales a little bit easier compared to rate setting, but I"m not highly confident in that. (since they already do that in open market operations, buy/sell).
  • More speculative…there may be something from the psychological argument of controlling inflation. Straight up increase money supply = “Oh boy, here comes inflation”…whereas QE is “new”…so participants are a little bit more unsure on the effect.

Interestingly enough, Friedman wrote about BoJ doing QE back in the 80’s.


Also, I may be in the minority here…but I’m not sure if the US could have gotten more lucky to have Bernake as the head of the fed during this time. While I believe in questioning authority, if there is one person who probably knows best about this type of stuff it’s probably him.

I see a lot of judgment towards QE and I’m curious…what would you have done? QE gets a lot of shit for “not working”…but fiscal policy has been absolute dog shit. The Fed can only do so much, especially at the zero bound.