US Federal Reserve ‘Might Legitimately Consider’ Public Money Creation

Written by Frank Van Lerven on June 20, 2016. 

http://positivemoney.org/2016/06/janet-yellen-public-money-creation/

The Federal Reserve ‘might legitimately consider’ using Public Money Creation in ‘extreme circumstances’, when there is ‘very weak growth’ or ‘deflation’, Fed Chairwoman Janet Yellen said earlier this week.
Yellen did not elaborate on what type of Public Money Creation the Fed would consider using. However, it is relatively safe to assume that it would most likely resemble some form of money-financed Helicopter Drops as advocated by Yellen’s predecessor – Ben Bernanke. In Bernanke’s proposal, the Fed would use newly created money to finance a tax-cut or direct cash transfer to households, such as a one-off citizen’s dividend.
Public Money Creation, using central bank money to directly finance spending in the real economy, has been taboo for over fifty years. In accepting that the central bank of the world’s biggest economy might have to create money to stimulate the real economy, Yellen is implicitly suggesting that central banks might need to update their toolkits.
While some form of Public Money Creation is looking increasingly like a policy reality, this is a massive step for the general debate and future direction of monetary policy. But more importantly, getting a central bank to create new money for the real economy also represents a substantial step in the direction of a full Sovereign Money System!

Below is a short transcript of Chairwoman Yellen’s remarks:

“In normal times I think it is very important that there be a separation between monetary and fiscal policy. And it is a primary reason for independence of the central bank. We’ve seen all too many examples of countries that end one high or even hyperinflation because of those in charge of fiscal policy direct their central bank to help them finance it by printing money and maintaining price stability and low and stable inflation is very much aided by having central bank independence.

Now that said, in unusual times where the concern is with very weak growth or possibly deflation, rather rare circumstances — first of all, fiscal policy can be a very important tool. And it is natural that it can be employed that just as monetary policy is doing a lot to try to stimulate growth that fiscal policy should play a role. And normally you would hope in an economy with those severe downside risks, monetary and fiscal policy would not be working at cross-purposes to get together.

Now whether or not in such extreme circumstances there might be a case for close coordination where the central bank playing a role in financing fiscal policy. This is something that academics are debating. And it is something that one might legitimately consider. I would see this as a very abnormal, extreme situation where goes in an all-out attempt — and even then it’s a matter that academics are debating — only in an unusual situation.”