E Frances Coppola On M And Helicopter Money

Frances Coppola is a very helpful blogger and economist who is widely published and well respected. She takes a dim view of asset inflation, as many economists rightly do. She knows that there has to be a better way to stimulate the economies of the developed nations. While she believes deficit spending is superior to QE, she is not opposed to helicopter money but is possibly denying its value as opposed to fiscal deficit spending. More on that later.

But first, we should see what her argument is against QE. Basically, she explains in a fantastic and fundamental way, the QTM, the Quantity Theory of Money, MV=PY. Basically she says that the left side of the equation, MV, meaning money supply times velocity, is affected by the right side of the equation, PY, which is price level times yearly output. So, MV is affected by PY, not the other way around. And PY is nominal GDP.

So, simply put by Coppola: 

“If M is fixed, then when Y is rising either V must rise (money must circulate faster, which implies people spending more frequently) or P must fall. But when P is falling, people tend to delay purchases, which slows the velocity of money. So falling P tends to be associated with falling, not rising, V. Thus, if M is fixed, Y will eventually stagnate or even fall.  M should be allowed to rise as Y rises, keeping the price level stable.

So, far from dissing it, Keynes in effect used the QTM himself. And yet he is definitely critical of it. So what is he really complaining about? His objection is to ACTIVE expansion of the money supply in order to stimulate output.”

So, M is not broad money, but rather is the monetary base, or base money. M is not a large amount compared to broad money, which is created by banks when loans are created. 

So, increasing M which never gets to the people, according to Coppola, is not going to do much for the right side of the equation. 

QE did not cause inflation because M went to the banks and the wealthy and it was not available to Main Street, and Coppola seems to understand the value of the equation when she says: