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James Dorn Contributor

I cover global economic policy issues. full bio →

Opinions expressed by Forbes Contributors are their own.

I am vice president for monetary studies, editor of the Cato Journal, senior fellow, and director of Cato’s annual monetary conference. I have written widely on Federal Reserve policy and monetary reform, and am an expert on China’s economic liberalization. I have edited more than ten books, including The Search for Stable Money (with Anna J. Schwartz), The Future of Money in the Information Age, and China in the New Millennium. My articles have appeared in the Wall Street Journal, Financial Times, South China Morning Post, and scholarly journals. I write regularly for Forbes.com. From 1984 to 1990, I served on the White House Commission on Presidential Scholars. I have been a visiting scholar at the Central European University and Fudan University in Shanghai. I hold a Ph.D. in economics from the University of Virginia.

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Opinion 11,423 views

Ben Bernanke's QE4: Another Step Toward Helicopter Money, And Away From Freedom

WASHINGTON, DC - NOVEMBER 09:  Federal Reserve...

Federal Reserve Chairman Ben Bernanke (Image credit: Getty Images via @daylife)

The Federal Reserve’s decision to enter the New Year by extending and enlarging its policy of quantitative easing is another step toward “helicopter money”—that is, directly increasing the public’s cash balances by an injection of high-powered money.  This could be done by dropping money from helicopters or by having the U.S. Treasury print checks while the Fed printed money.  The idea is to use the printing press to stimulate the economy by directly injecting new money into the spending stream without relying on lower interest rates and the financial system.

So far the Fed has resisted the temptation to turn to helicopter money.  But in entering its fourth round of quantitative easing (QE4), the Fed will buy $85 billion worth of mortgage backed securities and longer-term Treasuries per month until expected inflation reaches 2.5 percent, or unemployment falls to 6.5 percent.  The Fed’s macroeconomic models predict those thresholds won’t be reached until mid-2015.

With the end of Operation Twist, the Fed has largely depleted its stock of short-term Treasuries.  Under that program, the Fed bought $40 billion worth of longer-term Treasuries per month but sterilized those purchases by selling an equal amount of short-term bills.  QE4 will add more than $1 trillion to base money in 2013 because none of the outright purchases of MBS ($40 billion per month) and Treasury securities ($45 billion per month) will be sterilized.  Consequently, the Fed’s balance sheet will expand to more than $4 trillion by 2014 from less than $1 trillion prior to the 2008–09 financial crisis.

The explosion in base money has mostly ended up being held as excess reserves at the Fed and hasn’t had much impact on the monetary aggregates.  Weak credit demand (even at ultra-low interest rates) due to the efforts of private borrowers to rebuild their balance sheets, along with uncertainty due to regulatory fog and the “fiscal cliff,” and the payment of interest on excess reserves, have helped prevent the fourfold increase in the Fed’s balance sheet from spilling over into rapid money growth and inflation—as least for the time being.

The danger is to think that rapid increases in the monetary base will keep nominal interest rates permanently lower and that the excess reserves will not eventually be lent out in search of higher returns.  The Fed’s short-term vision and its acceptance of the idea that monetary policy can effectively generate maximum sustainable employment ignore a basic truth—printing money cannot substitute for the real determinants of prosperity.  Increasing the range of options open to individuals depends on greater economic freedom, not on destroying the value of money by creating an excess supply.

The problems of high unemployment and slow growth are not due to a failure of aggregate demand; they are due to a failure to safeguard the institutions necessary for economic harmony.  Those institutions include sound money, private property rights protected by the rule of law and limited government, interest rates and other relative prices that are free to move in line with market forces, and taxes and regulations that do not destroy incentives to work, save, and invest.

There is no evidence that easy money reduces unemployment or promotes long-run growth; but there is abundant evidence that excess money growth creates inflation and increases unemployment.  With QE4, the Fed is tilting its dual mandate toward reducing unemployment while allowing its price stability target to drift upward.

That policy drift is dangerous.  There are limits to monetary policy: the Fed does not have the knowledge to bring about full employment, which requires flexible relative prices for all factors of production.  The inflation-unemployment tradeoff is an illusion. By trying to use easy money to lower unemployment, the Fed risks further eroding the purchasing power of the dollar.  We should also not overlook the threat to economic freedom posed by even mild inflation, as the U.S. experiment with wage-price controls illustrated in the early 1970s.

A market-based monetary regime, like the gold standard, would not fix interest rates or have a central authority determine the optimal quantity of money.  The money supply would adjust to the demand for money—and the long-run value of money would remain relatively stable.  The central bank would not be able to monetize the debt or bail out banks that are too big to fail.  Fiscal policy would have to stand on its own.

The Federal Reserve Act, as amended, makes the Fed responsible for “maximum employment, stable prices, and moderate long-term interest rates.”  Only the second goal is attainable via monetary policy, provided the quantity of money grows in line with real output over the long run.  However, that objective (price stability) is more credibly attainable under a convertible currency than a pure fiat money.  Congress, by overextending the Fed’s policy objectives, has set the Fed up for failure and the politicization of monetary policy.

Instead of being a source of stability, the Fed has too often been “a major source of instability,” as Milton Friedman noted in 1972.  Without a credible monetary rule, there is no firm anchor for the dollar.  Moreover, the Fed has used its discretion to allocate credit and engage in fiscal policy.  By suppressing nominal interest rates and pushing real rates into negative territory, the Fed has engaged in financial repression.  There is a strong case that QE is boosting the growth of government spending while hampering real economic growth.

Fed Chairman Ben Bernanke has recognized the limits of monetary policy, but he believes those limits have not been reached.  Yet, in the view of one prominent policymaker, Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, “The potential costs outweigh what appear to be meager potential benefits of further asset purchases and extended forward guidance.”

Trying to stimulate the housing market by purchasing additional MBS only postpones the adjustment in housing prices that still needs to occur to bring about a balancing of demand and supply.  Supporting the government debt market, and creating a bubble in that market, only prolongs the incentive of politicians to turn to debt financing and continue the spending spree. And keeping interest rates at near zero levels continues to penalize millions of individuals who have saved for their retirement and now have to take on greater risks to try to maintain their living standards.  Those and other costs of Bernanke’s “grand experiment” need to be recognized.

Bernanke has argued that he is not putting “monetary policy on auto-pilot” with QE4.  He is merely using economic targets for unemployment and inflation as guides to monetary policy—that is, as indicators about when to begin increasing the Fed funds rate.  As such, there is still no binding monetary rule, so uncertainty about future policy persists.

The Fed is evading commonsense and sound economics by relying on fancy stochastic dynamic general equilibrium models, in which erratic money plays no role, and ignoring the fact that the real source of consumption is production, not money.  But for supply to create its own demand, markets must be free to determine relative prices, including interest rates.  Free private markets also require sound money—that is, money of stable value.  Inflation, even mild inflation, destroys confidence in the future value of money under a discretionary government fiat money regime.

The Fed will find it increasingly difficult to reverse course—and raise rates—as core inflation reaches the 2.5 percent threshold.  It will be more politically tenable to inflate the debt away than to increase interest rates and taxes.  That is why one should not rule out the temptation for the Fed to resort to helicopter money.  Indeed, there is a growing chorus now calling for considering the “helicopter drop.”

The Financial Times, in an editorial entitled “Helicopter Money: Extreme Money-Printing Should Be Openly Discussed” (October 13–14, 2012), stated: “Printing money—not just temporarily for trading securities in the market, but permanently handing it over to be spent by someone—is the central banker’s ultimate heresy.  Yet it would be irresponsible to rule the option out.”

Sir Samuel Brittan, a columnist for the FT, has suggested that in a situation with “deficient demand,” a helicopter drop of newly printed money would “boost output and employment.”  He even offers an “ingenious” twist in which “helicopter money could be stamped so that it lost its value if it were not spent by a certain date” (Financial Times, August 31, 2012).

That experiment was tried in Zimbabwe and failed miserably.  Gideon Gono, head of the central bank, created massive amounts of Zimbabwean dollars and placed expiration dates on the notes.  The result was a large increase in the velocity of money and hyperinflation.  The government then imposed price controls and blamed “capitalists” for the disorder.  The loss of economic and personal freedom that resulted should be a warning to any central bank considering the helicopter drop.

If there were “deficient demand,” there would be deflation, not inflation.  The high rate of unemployment in the United States is due primarily to structural problems, high marginal tax rates, minimum wage laws, the extension of unemployment benefits, the high cost of employer-provided health benefits, and uncertainty regarding future fiscal rules and regulations.  Fear of going off a “monetary cliff” unless the Fed increases aggregate demand is misplaced.  The real issue is the rise of the welfare state and a monetary system aimed at supporting big government—rather than limiting its power by denationalizing money.

Rather than considering helicopter money, it would be wise to convene a National Monetary Commission and have a serious debate about rules versus discretion and about alternatives to government fiat money.  Limiting the Fed to a single target—zero inflation—would be a step in the right direction.  Making the dollar convertible into gold or silver or a basket of commodities and abolishing the central bank would be even more consistent with a free society.  As Alan Greenspan wrote in 1966, “Gold and economic freedom are inseparable.”

James A. Dorn is a monetary specialist at the Cato Institute and editor of the Cato Journal.

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  • Stephen Harner Stephen Harner, Contributor 2 years ago

    Excellent analysis and prescription. I read the FT column by Samuel Brittan in shock and disbelief. With the Fed in the lead, we seem have have lost completely any sense of the potentially disastrous consequences, as you point out, of monetary incontinence.

  • Mr. Harner,

    Mr. Dorn’s comment were informed by the editorial in the Financial Times (which you allude to) and that editorial was based upon a different piece also in the Financial Times [1]. There the Lord Turner, head of the Financial Services Authority (the British equivalent to the Federal Reserve) has already gone “far outside past orthodoxy” may go further yet. He was of course speaking of Quantitative Easing Policy (QEP) which the FSA (like the Federal Reserve and the Bank of Japan have done).

    Both the Financial Times editorial and Mr. Dorn’s blog conflate QEP with Dr. Milton Friedman’s description of Keynesian Stimulus (i.e.“The Helicopter Drop”). They are however quite different, the former merely puts more money into bank vaults while the latter puts more money into peoples’ pockets (this is discussed in more detail below). the Federal Reserve can only do the former and Congress and only do the latter.

    One element that Mr. Dorn and the Financial Times both correctly identify as an element of QEP is that it will, if successful, stimulate inflation. However both Mr. Dorn and the Financial Times view this as a bad thing. However the UK, like Japan and the US, has been facing deflationary pressures for many years now, not inflationary pressures. QEP has as one of its explicit goals the combating of deflation. That is why the Federal Reserve, FSA, and Bank of Japan have been attempting to stimulate a small amount of inflation, to counter the existing deflationary trends.

    One of the conceptual problems is that almost everyone alive today came of age after the mid-1930′s. Most people (outside of Japan) have never experienced deflation and their thinking is colored by their experiences with the intense periods of inflation that occurred in the 1970′s. However, prior to the mid-1930′s, deflation, not inflation was the principal economic woe. Periods of deflation have in the past been associated with economic decline, such as the Long Depression of the 1870′s and the Great Depression of the 1930′s. Since then the Federal Reserve has successfully combated deflation. There is probably no one alive today who can remember the devastating effects of deflation exactly because of the success of the Federal Reserve in combating (rather like the way no one fears small pox today but 100 years ago it was a terror).

    One cannot critique QEP, including its inflationary elements, without understanding the goal of QEP, to combat deflation.

    [1] http://www.ft.com/intl/cms/s/0/66eae5fc-1398-11e2-9ac6-00144feabdc0.html#axzz2GNmKdIPC

  • excellent article. I have done several interviews making the same points:



  • John Hayes John Hayes 2 years ago

    “Dropping money from helicopters”

    Excellent description of our trillion dollar welfare state. As the federal government (starting with the GW Bush administration) has increased and extended the incentives to stay out of the work force, it should come as no surprise that the employment participation rate is near historic lows.

    And people still wonder what’s happening to the “middle class”?

  • Hello John Hays,

    You wrote:“As the federal government…has increased and extended the incentives to stay out of the work force, it should come as no surprise that the employment participation rate is near historic lows.”

    1)The Labor Participation Rate (LPR) has little to do with government policies and reflects long term trends. The LPR has been declining steadily since January of 2000 when the highest rate was recorded (67.3%).




    The decline in the LPR since 2000 is not the result of government policies of either Mr. Bush or Mr. Obama any more than the rise in the LPR after 1970 was the a result of the policies of Lyndon Johnson or Richard Nixon.

    2) In October of 2012 (the most current data available) there were 3.7 million job openings. There are 12 million people unemployed. If every single open job were filled tomorrow, there would still be over 8 million unemployed people. This situation is an improvement over the last several years. There are fewer and fewer jobs, and those that exist are part-time and/or temporary and pays low wages with no benefits.

    This is why the LPR is declining, it is becoming harder and harder to obtain and retain employment that an individual can support his or herself with, many workers are discouraged and drop out of the labor force.

  • Mr. Dorn,

    It seems that you have confused two entirely different issues.

    1) Under the Quantitative Easing Policy (QEP) the  Federal Reserve purchases debt (US Treasury Notes) from commercial banks.  This increases the amount of money available to be loaned to businesses (a common short hand for this is “liquidity”).  This is an important element of an “stimulus package” but it is not the same thing as the conventional Keynesian Stimulus (i.e. the “Helicopter Drop”).





  • michael quinn michael quinn 2 years ago

    “None of these thing [sic] put any more money into the pockets of people, it just makes it easier for businesses to borrow money.”

    This is a misconception that misses the horrible consequences of inflation. When the Fed “increases the amount of money available to be loaned to business” by providing “liquidity” it causes money to be printed and distributed to large commercial banks. This puts “more money into the pockets of people,” namely Wall Street bankers. As a result, the banks who receive the new money first get a windfall, as do the large businesses that get the money second as a result of their relationships with large banks. The people who get the money last – the poor and middle class – get nothing but higher prices and a decease in the value of their savings.

    When the Fed provides “liquidity,” what it is really doing is stealing from savers and the poor for the benefit of the Fed’s members – the large banks.

  • Hello michael quinn,

    Simply increasing the volume of money does not cause inflation per se. There is a formula from quantitative economics which can explain things. The equation is MV = Py where M is the money supply, V was the velocity at which money changes hands, P was the average price of goods and services, and y was the total quantity of goods and services. If the money supply (M) were to increase while V and y were to remain constant, then the average price of goods and services (P) would necessarily increase in direct proportion the increase in M. So in a stable and simple economy, M and P should increase together. However, during a recession, people do not spend their money as much, they conserve – save. In many cases they have less to money to spend. As a result, V declines. Retailers reduce their inventory, y declines. In this environment the money supply can increase with no impact on prices.

    In 2008 M0 (the base money supply, cash) was 800 BUSD while today it is 2,800 BUSD, a very large increase, over 300%. M1 was 1,300 BUSD in 2008 but is now 2,300 BUSD. However, M2 did not increase nearly as much, from 8,00 BUSD to 10,000 BUSD, just 20%. M3 has hardly changed at all, 13,000 BUSD in 2008 to 14,000 in 2012, not even 10%. So even if the Federal Reserve increases the base money supply (M0), the only supply that they have any control over, the total amount of money does not really change very much [1].

    Further, let us examine the velocity of M1 and M2. As noted above, the volume of M1 and M2 have increased [2] but the velocity of both have declined. The velocity of M1 had an all time peak in 2008 of just over 10 but is today a lowly 6.924. The velocity of M2 is today only 1.575, the lowest level recorded by the Federal Reserve (it was 1.9 in 2008 and peaked in 1998 at just over 2.1). The velocity of M0 and M3 are down as well.

    In this economic context, one can increase the base volume of money all one likes, it will produce only minimal inflation. In fact, in conditions of declining velocity, deflation, not inflation, is the more likely outcome.

    [1] http://research.stlouisfed.org/fred2/series/MULT?cid=25

    [2] http://research.stlouisfed.org/fred2/categories/32242

  • michael quinn michael quinn 2 years ago

    An increase in the volume of money is by definition inflation. An increase in the level of prices is a consequence of inflation, not inflation itself. Price levels frequently rise slower than the actual inflation at first, and during the later stages of inflation the increase in prices greatly exceeds the increase in the money supply. This occurs because people realize they are being robbed, and move quickly (and recklessly) to get rid of their cash holding for fear of the dollar crashing. When this happens, it is too late to do anything about it.

    If you start with a false definition of inflation, as you have, you can come up with all sorts of justifications for increasing the money supply. But no matter what justification is put forward, you simply cannot escape the basic law of supply and demand. Money, like every other commodity, is subject to this basic principle, and if you increase the supply of money without a corresponding increase in the demand, the value of money will decrease.

  • Hello michael quinn,

    You wrote:“An increase in the volume of money is by definition inflation.”

    This is most certainly incorrect. Inflation is by definition an increase in prices. Inflation can be cause by a number of things, an increase in demand as compared to supply during a period of economic expansion is an example. In a period of economic expansion when monetary velocity is high, if the supply of money is increased, then inflation can result. However that is not true under all conditions.

    Using the equation MV = Py and let the values for M, V, P, and y be set at 10 so that MV = 100 = Py. If V and y are held constant at 10 but if the supply of M is increased to 20 then it follows that prices, P, must increase to 20 as well (MV = 200 = Py).

    Increasing the money supply with a constant money velocity and quantity of goods and services would result in increases in prices, i.e. inflation.

    However, if monetary velocity, V, were decline to 5 and M and y were held constant at 10, then prices P would have to fall to 5 as well (MV = 50 = Py).

    Decreasing the money velocity with a constant money volume and quantity of goods and services would result in decreases in prices, i.e. deflation.

    In fact in a situation of decreasing money velocity, it would be possible to increase the volume of money resulting in no price changes at all. If the V were to decrease from 10 to 5 but M were to increase from 10 to 20 and the quantity of goods and services were to remain constant, then prices would remain constant.

    As the links provided demonstrate, the velocity of money in the United States has been declining for several years now. Without an increase in the volume of money, the US economy would see deflation. In this situation, it is desirable to stimulate inflation to combat deflation.

    <b<The question is not whether an increase in money supply causes inflation per se but rather why would a central bank want to flood the economy with money to stimulate inflation? The answer is to fight deflation.