I would say that "dismiss" is too strong a word. The helicopter drop is a first approximation that no one should dismiss. I could offer a long list of complexities. One is that price behavior is sticky in the short run.
I think that most economists would say that the helicopter drop model is most on target the larger the magnitude of the helicopter drop, the closer the economy is to full employment, and the longer the time frame one is using. A few economists, like Kelton, would dismiss the helicopter drop model at anything less than full employment. I think that those who bet on her will lose, and lose badly. We will know within a few years.
Is GDP the right denominator for computing the expected inflation, as opposed to total wealth or value of durable assets? Helicopter money could be used to bid up the price of my house, even though it was "produced" 40 years ago and has not contributed to the GDP calculation since then.
As another thought experiment, if the pandemic shut down 100% of all economic production for 2020 and Americans were living on their savings, would any amount of stimulus cause an arbitrarily large amount of inflation?
In the short run, I can see helicopter money going into asset prices, with less going into the prices of goods and services. But eventually you spend your home equity.
The second thought experiment would force us to think about imports, which would become the only source of goods and services. The price of imports would go up, but not to infinity.
If you say no imports because all economic production everywhere in the world gets shut down, then presumably people run out of food and then die. So such a thought experiment is beyond economics.
I apologize for my ignorance, but I do not understand how the federal government running an annual deficit through borrowing (without money printing) equates to a helicopter drop. There is probably quite a bit of borrowing in the private sector each year too. Would this also be considered a helicopter drop?
If you borrow $1000 from me, then you know that you owe me $1000. Your wealth is unchanged. So no helicopter drop
If the government borrows $1000 from me to give to you, then your wealth goes up by $1000. My wealth stays the same (I gave up $1000 in cash and received $1000 in government bonds).
The additional $1000 debt of the government is going to have to be paid at some point by somebody. But none of us thinks that we will be the one stuck paying the bill. So government bonds become "net wealth." (There is controversy about that--you can Google about it)
Seems like when your bond principal becomes due and is paid by the gov’t, the funds would come from tax revenues (or perhaps from new bond issues that will, at some point, be paid through tax revenues). No?
To have an inflation of 0%, isn't it sufficient that the amount of money tracks the amount of good and services produced? A constant money supply would be deflationary, wouldn't it?
You are ignoring that since the 1980s, the Fed --like many other central banks-- has been financing their purchases of Treasury bonds by borrowing from banks, not by "creating money". When the People's Bank of China (the country's central bank) buys U.S. Treasury Bonds the purchase is financed by borrowing from the banks, not by printing money. Indeed, both American and Chinese commercial banks borrow from individuals, families, and companies. You have been writing about monetary policy for a long time and yet you still fail to understand the big change in how some governments can finance their deficits. By comparison, Argentina's central bank cannot finance the government by borrowing from domestic and foreign banks because they exhausted that borrowing long ago (in the past 70 years, Argentina's central bank has been printing money to finance government deficits).
Indeed, the only relevant question is how long the U.S. Fed can continue to borrow from banks to finance the government. When that day arrives, you can bet that the Fed will print money to service the outstanding debt and finance the remaining deficit. BTW, I'm a very old Argentinian that advised the People's Bank of China in the 1990s on how to prevent a banking crisis.
Fine example to start, but hugely missing where the $100 billion goes today. Into the stock market, and other financial assets being bought by the rich as investments. That's why Apple became a $1 TRILLION company a few years ago, in market capitalization (# shares * share price). How much of the helicopter drop money goes into shares? How does that affect "good and services"? Buying paper (or now digital) shares, with digital Fed based money, does not increase the demand directly.
We're already having Asset price hyper-inflation. Venezuela, and Zimbabwe last decade, and other hyper-inflation episodes always included other economic mismanagement so that there were shortages of food, and other goods normal folk really wanted.
I recall reading, unbelievably, that Tokyo, in 1989, was worth more than the USA. All the real estate in all 50 states. (Prices per sq foot / sq meter). {Wiki says: At their peak, prices in central Tokyo were such that the Tokyo Imperial Palace grounds were estimated to be worth more than all the land in the entire state of California}
Japan's 3 lost decades, and counting, has not yet been enough to fully digest that financial elephant. But no hyper inflation; in fact, so little inflation it's more like deflation.
Arnold, where is your Bet? Your 5 to 10 percent possibilities seem a bit intellectually flabby:
"Over the next five years, if only the last two years of Helicopter Drops ends up in prices, then prices should end up about 25 percent higher, for an average inflation rate of 5 percent. But if some of the pent-up inflation from previous Helicopter Drops shows up, the inflation rate could be closer to 10 percent."
The 5 year average is probably a good time, if you make bets each year. But you seem unwilling, as Steve Sailer is also unwilling, to actually say what your probabilities are. 90%? 10%? 50%?
What “real-world” complexities cause economists to dismiss the helicopter drop as a simplistic model?
I would say that "dismiss" is too strong a word. The helicopter drop is a first approximation that no one should dismiss. I could offer a long list of complexities. One is that price behavior is sticky in the short run.
I think that most economists would say that the helicopter drop model is most on target the larger the magnitude of the helicopter drop, the closer the economy is to full employment, and the longer the time frame one is using. A few economists, like Kelton, would dismiss the helicopter drop model at anything less than full employment. I think that those who bet on her will lose, and lose badly. We will know within a few years.
Is GDP the right denominator for computing the expected inflation, as opposed to total wealth or value of durable assets? Helicopter money could be used to bid up the price of my house, even though it was "produced" 40 years ago and has not contributed to the GDP calculation since then.
As another thought experiment, if the pandemic shut down 100% of all economic production for 2020 and Americans were living on their savings, would any amount of stimulus cause an arbitrarily large amount of inflation?
In the short run, I can see helicopter money going into asset prices, with less going into the prices of goods and services. But eventually you spend your home equity.
The second thought experiment would force us to think about imports, which would become the only source of goods and services. The price of imports would go up, but not to infinity.
If you say no imports because all economic production everywhere in the world gets shut down, then presumably people run out of food and then die. So such a thought experiment is beyond economics.
I apologize for my ignorance, but I do not understand how the federal government running an annual deficit through borrowing (without money printing) equates to a helicopter drop. There is probably quite a bit of borrowing in the private sector each year too. Would this also be considered a helicopter drop?
If you borrow $1000 from me, then you know that you owe me $1000. Your wealth is unchanged. So no helicopter drop
If the government borrows $1000 from me to give to you, then your wealth goes up by $1000. My wealth stays the same (I gave up $1000 in cash and received $1000 in government bonds).
The additional $1000 debt of the government is going to have to be paid at some point by somebody. But none of us thinks that we will be the one stuck paying the bill. So government bonds become "net wealth." (There is controversy about that--you can Google about it)
Seems like when your bond principal becomes due and is paid by the gov’t, the funds would come from tax revenues (or perhaps from new bond issues that will, at some point, be paid through tax revenues). No?
Probably paid from more bonds, actually.
To have an inflation of 0%, isn't it sufficient that the amount of money tracks the amount of good and services produced? A constant money supply would be deflationary, wouldn't it?
You are ignoring that since the 1980s, the Fed --like many other central banks-- has been financing their purchases of Treasury bonds by borrowing from banks, not by "creating money". When the People's Bank of China (the country's central bank) buys U.S. Treasury Bonds the purchase is financed by borrowing from the banks, not by printing money. Indeed, both American and Chinese commercial banks borrow from individuals, families, and companies. You have been writing about monetary policy for a long time and yet you still fail to understand the big change in how some governments can finance their deficits. By comparison, Argentina's central bank cannot finance the government by borrowing from domestic and foreign banks because they exhausted that borrowing long ago (in the past 70 years, Argentina's central bank has been printing money to finance government deficits).
Indeed, the only relevant question is how long the U.S. Fed can continue to borrow from banks to finance the government. When that day arrives, you can bet that the Fed will print money to service the outstanding debt and finance the remaining deficit. BTW, I'm a very old Argentinian that advised the People's Bank of China in the 1990s on how to prevent a banking crisis.
Fine example to start, but hugely missing where the $100 billion goes today. Into the stock market, and other financial assets being bought by the rich as investments. That's why Apple became a $1 TRILLION company a few years ago, in market capitalization (# shares * share price). How much of the helicopter drop money goes into shares? How does that affect "good and services"? Buying paper (or now digital) shares, with digital Fed based money, does not increase the demand directly.
We're already having Asset price hyper-inflation. Venezuela, and Zimbabwe last decade, and other hyper-inflation episodes always included other economic mismanagement so that there were shortages of food, and other goods normal folk really wanted.
I recall reading, unbelievably, that Tokyo, in 1989, was worth more than the USA. All the real estate in all 50 states. (Prices per sq foot / sq meter). {Wiki says: At their peak, prices in central Tokyo were such that the Tokyo Imperial Palace grounds were estimated to be worth more than all the land in the entire state of California}
Japan's 3 lost decades, and counting, has not yet been enough to fully digest that financial elephant. But no hyper inflation; in fact, so little inflation it's more like deflation.
Best fast measure of consumer price change might be CPI, but also might be cost of Big Mac. https://www.statista.com/statistics/274326/big-mac-index-global-prices-for-a-big-mac/
Arnold, where is your Bet? Your 5 to 10 percent possibilities seem a bit intellectually flabby:
"Over the next five years, if only the last two years of Helicopter Drops ends up in prices, then prices should end up about 25 percent higher, for an average inflation rate of 5 percent. But if some of the pent-up inflation from previous Helicopter Drops shows up, the inflation rate could be closer to 10 percent."
The 5 year average is probably a good time, if you make bets each year. But you seem unwilling, as Steve Sailer is also unwilling, to actually say what your probabilities are. 90%? 10%? 50%?
Mine (change in price of Big Mac in USA in USD):
<5% 50%
5-10% 40%
> 10% 10%