In his piece on helicopter money, Lord Adair Turner seemed to argue that:

1) The money multiplier provides the needed boost to expansionary fiscal policy, yet this boost could generate inflation.

2) The risk of inflation could be managed by raising reserve requirements as needed.

Both statements are incorrect.

And this is the slightly expanded version of my Letter to the Financial Times (FT.COM published an abridged version)

In ‘The helicopter money drop demands balance’ (May 22), Lord Adair Turner defends the notion that bigger fiscal deficits are needed to end the current stagnation, but leaves one question unanswered: Why should a money-financed deficit be more powerful than a traditional debt-financed deficit?

Money-financed fiscal deficit is one particular form of government spending (in excess of taxes) that is funded by the central bank directly crediting the recipient banks with central bank money. In a traditional debt-financed fiscal deficit, banks are ultimately credited with government securities.

The expansionary effect of the two options must then be equivalent, as private sector’s disposable income increases by precisely the same amount, the only difference being that banks hold a bigger balance with the central bank in one case and a bigger credit balance with the government in the other case.

Indeed, large-scale purchases of government debt by central banks (a.k.a. QE) are a form of ‘helicopter money’ for a given fiscal stance, as they substitute central bank money for government debt, and their dismal results are evidence that funding public debt with central bank money provides no special boost.

The belief that an increase in bank reserves would boost an expansion of bank credit has been convincingly refuted by all central banks’ experts on monetary operations. The money multiplier is inapplicable to a floating currency, and the only reason for having reserve requirements is to limit the volatility of money market rates under current liquidity management arrangements.

Turner recommends helicopter money as a way to manage fiscal deficits without creating more public debt. However, central bank money is another form of debt, and any narrative that begins by assuming that government debt is bad won’t go very far by proposing an increase of debt in a different form.

A better version of Turner’s important point that fiscal deficits are needed is to question current debt limits. Designed to check governments’ spending power, they have caused collateral damage by leaving it entirely to private debt to support growth. And private debt is critically pro-cyclical.