Barbara’s Blog 10-12-2008

With the threat of deflation looming, could we soon see the world’s leading economies printing money? Barbara Panvel sees one heretical view become the new orthodoxy.

Six years ago, before being made Chairman of the US Federal Reserve, Ben Bernanke said - quoting economist Milton Friedman - that if the US economy slid into deflation the Fed could drop money from helicopters, presumably to create ‘effective demand’.

He pointed out that the government in a fiat money system owns the physical means of creating money.

Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money: "If we do fall into deflation we can take comfort that the logic of the printing press will assert itself and a sufficient injection of money will ultimately always reverse a deflation."

Critics who disliked the idea of expanding the money supply in that way nicknamed him ‘Helicopter Ben’.

Since the financial crisis, the Financial Times is no longer regarding such suggestions as impracticable.

Last Friday, Martin Wolf, its chief economics commentator, contemplated the possibility of "government initially financing its deficits by borrowing from the central bank (and so by "printing" money)", and Philip Stephens, another associate editor of that paper, went even further, writing: "printing money, a mortal sin under the fracturing Washington consensus, is the new prudence".

These changes from orthodoxy to profligacy compare strangely with the far wiser proposals steadily advocated by MP Austin Mitchell over the years.

No random helicopter drops for him: instead, proposals to spend fiat money into circulation in a focussed way, meeting unfulfilled public needs such as financing hospitals and - as the Green New Deal contributor said last week - investing in environmental technology which will reduce greenhouse gas emissions.

The formerly orthodox now preach heresy ‘under the fracturing Washington consensus’ and Mitchell, once regarded as radical is clearly sane, safe, consistent and constructive - but only when political backs are even further against the wall will he be heeded.

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