Helicopter debt

When economic science is in crisis

Yesterday, I was very surprised to learn that Ben Bernanke had won a Nobel Prize "for research on banks and financial crises". While economists have a tendency to disagree with each other more often than not, over the years, this news shocked me. To be frank, it saddened me and confirmed my beliefs that the scientific state of this academic discipline remains in a deep state of crises.

What economists don't get: The intricate link between money and debt

In general, economists tend to speak about money and debt as if they are two separate phenomena. Of course, we may experience such as individuals, as we can have more debt, less debt, more money or less money, but systemically, money and debt cannot be separated.

We notice this existential link between money and debt ourselves when new money is created in our accounts, when we take out a loan for instance. Our credit balances (our money) is increased by the amount of the loan and our debit balances (our debt) is also increased by the amount of the loan. We call this process balance sheet lengthening, and can see that money is created simultaneously with debt creation. Banks cannot create money and debt infinitely by lengthening their balance sheets, as they need to maintain certain capital and liquidity buffers in relation to the size of their balance sheets.

Likewise, when we repay our loans, we destroy debt, by destroying money. We notice that the credits in our current, checking or deposit accounts are being reduced with the same amount with which our debits of debt are being reduced. This process is called balance sheet shortening.

When we receive money in our current accounts, we receive such by the transfer of credits from the person or organisation that is paying us. While we do get more money, that money was already existing and not newly created, as would be the case with balance sheet lengthening.

When we take a look at our current financial-monetary systems, give or take 95% of our money is created and exists by the simultaneous creation of debt. The remainder is covered by reserves, like gold or silver in the vaults of central banks and makes up a fraction of the total monetary base.

Comparing demographers with economists

The difference between demographers and economists is that demographers look systemically at things, whereas economists look at individual cases and then extrapolate matters, believing that the system works like this as well.

When demographers make plans with intentions to increase or decrease the population in certain areas, they plan for the total population and then subdivide in boys and girls, women and men. They understand that you cannot plan for the female population to increase when you simultaneously intend to reduce the male population. They understand the intricate link between the two sexes with reproduction, migration and life departures.

Economists on the other hand do not seem to grasp the idea that debt and money increase and decrease simultaneously in the system. Within the context of the euro zone for instance, most economists believe that Italy can reduce its indebted position, but in order to do so it needs to destroy money, not being Italy's and probably Germany's as Germany is by far the largest net-creditor in the euro zone currency system. Now, how is that going to happen?

Bernanke's legacy

The name "helicopter money" was first coined by Milton Friedman in 1969, when he depicted the dropping of money from a helicopter to illustrate the effects of monetary expansion. In November 2002, Ben Bernanke, then Federal Reserve Board governor, and later chairman suggested that helicopter money could always be used to prevent deflation.

Bernanke took over the Fed's presidency in 2006 and with the start of the financial crisis in September 2008, when the Fed's balance sheet was just below the threshold value of 1 trillion US dollar, an imaginative helicopter fleet started bombarding money in unprecedented ways. When Bernanke's presidency finished, five and a half years afterwards, the balance sheet had more than quadrupled, reaching over 4 trillion dollars. A precedent was created of extreme monetary expansion that was followed by many other central banks and again in the COVID crisis that followed later.

Economists tend to talk in appreciative terms of these events, as monetary expansions indeed helped society to navigate away from deeper felt crises in the short run, but at what costs?

When you search the Internet for "helicopter money", you get plenty of hits. If you search for "helicopter debt", (till today) you don't get hits that relate to expansionary monetary policies, yet, helicopter debt is as much a reality as helicopter money.

Bernanke's legacy will surely highlight the man who was the founding father of the fastest monetary expansion in real terms (corrected for inflation) in history. Will he also be remembered for most indebting society (corrected for inflation) with the introduction of these same policies?

A Nobel Prize for the man who invented and applied helicopter debt, is illustrative for the critical state in which Economic Science is taught and applied.

Comparing economists with surgeons

Monetary expansionist policies (or balance sheet lengthening) are like providing pain killers to patients with a wound. You can give more and more pain killers, but in the end, the wound needs to be treated. Economists treat the current financial-monetary system like a patient who is run into an emergency room, providing more and more painkillers, rather than applying surgery, what a surgeon typically does.

Applying surgery: Decoupling money from debt

When Central Banks pursue positive inflation targets, they intend to grow the money supply faster than productivity, or the size of the economy. But when they do so, they also grow the debt supply faster than the economy. It is for this reason that we have systemic debt-spirals in between systemic crises. During a financial crisis, typically parts of outstanding debts are forgiven while an equivalent amount of monetary wealth is being destroyed.

Moreover, once we see the plain and simple "total credits equal total debits" dynamics of the system and realise that we all want to increase our "credits minus debits" position, we also realise that one can only be better of, if at least another is worse off.

The solution to the problem is simple, we have to ensure that our financial-monetary systems change and that money is decoupled from its co-existence with debt. While this may prove to be a Herculean task, it is time that economists become surgeons and heal the wounds that our debt based financial-monetary system has imposed on us.

We have had value-based monetary systems in history that did not have the current challenges we face with inflation and debt spirals. It is time to learn from them and above all learn from nature that also doesn't apply debt, credit, debit and interest.

For those who have an interest to dive deeper into matters on how money can be decoupled from debt in the current financial-monetary system, please take a look at the following pre-published white paper that suggests a scenario for the euro currency system (but it can be applied elsewhere as well).

Finally, what may have been worse than helicopter debt, is the fact that economists have been lulled into sleep by helicopter policies, postponing the necessary systemic surgery with at least another decade or so.

From here, let's be optimistic about the future, because a future with money that is decoupled from debt, is really worth living for.