So Frances Coppolla doesn’t understand QE either then

The thesis behind the book is that, although quantitative easing since the Great Financial Crisis of 2007/8 has failed, the cause of failure was its implementation, not the policy itself. Quantitative easing was a policy proposed by Milton Friedman and Ann Schwartz back in 1963 as a way to counter a financial depression, or “Great Contraction” as they termed it. The idea was to radically increase the money supply, providing consumers with money to resuscitate the economy. Five years later Friedman used the metaphor of a helicopter dropping money over communities to achieve this goal. He emphasised that it had to be a one-off event to discourage people from saving it, thinking there was more to come.

Following the Great Financial Crisis, central banks worldwide initiated Friedman’s policy of helicopter money, dispensing trillions of dollars. However, as Coppola explains, this massive use of quantitative easing, or the “Great Experiment”, failed because Friedman’s “‘helicopter drop” came to mean not putting money into people’s pockets, but rather casting money blindly onto international financial markets without regard to where it would end up. The desired result did not happen; instead we find ourselves in the “Long Stagnation”.

So where did the helicopter money go after it was distributed to the financial sector and corporations? Much of it was invested in emerging markets. Corporations used it to buy back shares to increase the price of their stock and bonds without increasing productive activity, or as Coppola writes “Wall Street is awash with money, while Main Street dies of thirst”. This explains the asset bubbles and the low unemployment rate in some nations, while wages remain stagnant.

Friedman starts from MV = PQ.

If V falls then we’re going to have a recession possibly plus deflation – the two possibly being a depression.

So, if V falls increase M.

Did V fall? Yes. Did we increase M? Yes. Did we have a depression? No. Did we have deflation? No. In fact, once we started QE, the recession stopped.

QED, QE worked.

Helicopter money is something else, something more, to be done only if QE fails.


The argument that the new money must flow through to the real economy isn’t QE, that’s straight Keynes. Let’s go spend lots of money on stuff. And sure, that can work. We can have lovely arguments about whether it works better etc, but it’s a well known thing.

And we’re really not going to do $4 trillion of it, as the Fed did with QE. ‘Coz it’s a different thing, see, subject to different constraints.

Coppola concludes:

“There must be zero tolerance of polices that exacerbate inequality and hurt the poor. Public investment banks and sovereign wealth funds must be created in every nation.Laws and rules forbidding cooperation between governments and central banks need to be removed, especially in view of the climate crisis.”

And that’s just being stupid. The reason we have central bank independence is so that the politicians don’t control everything.

16 thoughts on “So Frances Coppolla doesn’t understand QE either then”

  1. What do you make of the argument , propounded by John Redwood ( who I assume you like ) and one R Murphy( who I you seem to have have complex feelings about ) – that the state owned debt , the QE but is not debt and we do not have to pay it back.
    So basically we can just print money.
    ..and ( natch) can throw as much around now as we like …

    This seems counter intuitive to me but then I don`t really understand how monetarism does much good either ( or throwing money out of a helicopter )

  2. Sure, it doesn’t “have” to be paid back. If we’ve had a permanent change in V then we’d need the larger monetary base. But the general thinking is that V will recover (see it charted here at which point we’ll want to reduce M by reversing QE.

    The Federal Reserve is already reversing QE, has for a year or two. They say that they’ll not reverse all of it but some goodly portion only.

    If V doesn’t recover then we don’t need to reverse it. Standard theory says it will. Standard theory can be wrong of course.

    The statement “We’ll never need to reverse it” is, in that Yes Minister sense, being very brave.

  3. “The likelihood of politicians not reversing it is the reason to buy gold.”

    Or any (non depreciating) asset other than the currency you don’t trust?

    Property or land in a jurisdiction that you trust, a currency you do trust not to inflate, diamonds, whatever?

  4. Dennis the Peasant

    Laws and rules forbidding cooperation between governments and central banks need to be removed, especially in view of the climate crisis.”

    Nothing says you’re serious about “climate change” like worrying out loud about what central banks are going to do.

  5. PF Yes. Politicians seem determined to destroy the value of money. Buy something else to hedge the value of your savings.

  6. …and not financial instruments. Avoid equities, bonds, bank savings, etc…

    Gold, property, baked beans, shotgun shells – that sort of thing.

  7. Shame, but Frances seems both to lose the plot and to piss people off more and more these days.

  8. I’ve never met an economist who could describe any empirical evidence in favour of MV = PQ. It seems to be just a tautology.

  9. Tautology perhaps, definition maybe.

    Assume we use money for economic activity. Which, given that we define GDP – that version of our measure of economic activity – as economic activity that is intermediated by money seems fair enough. Thus the price times quantity of economic activity – the GDP – must be equal to the amount of money we’ve got and the number of times we use it.

    The definition seems sound. The uses to which it’s put might be a little dodgier……

  10. Gold? The government can just invite you to exchange your gold for their fiat currency (which they’ll promptly devalue). Invite you with guns if necessary. As already demonstrated by that land of the free across the sea. They’ve moved on to just taking your shit for driving down a road once used by a criminal. Very advanced they are.

  11. Climate crisis? True the daily minimum temperature in the winter months in the UK is a little bit higher than it was 200 years ago – I don’t think there are any comparable databases for the rest of the planet. We now learn that the corals in the Great Barrier Reef have not been dying off. There is more ice in Patagonia than we once thought. In the words of Jim… Crisis, what crisis?

  12. @PJF

    Isn’t Trump and Courts stopping this asset seizure by police?

    Anyway, not much diff from Blair/Cameron’s proceeds of crime, prove where money came from, cash seizures at airports etc

    Yet we criticise Dubai customs for arresting a Brit with cocaine on sole of shoe…

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