I have some theoretical sympathy with the Austrian notion of "distortions" in price signals caused by policy activism. But Hayek himself recognised that economies are not simple "equilibrium machines". There may be some "false" price signals from counter-cyclical policies but this is outweighed by the negative effects of extremely destructive cyclical pessimism in the recessions ( think the Eurozone). Also the potential distortions our cash transfers might cause pale in comparison to the huge shifts in interest rates and asset prices which are occurring. Hayek's main concern was inter-temporal distortions. If central banks used cash transfers to combat recessions, interest rates would on average be more stable and less volatile.

< you don't get to pick and choose your inflationary effects.

You do if you're a 17th-century mercantilist (more accurately known as a "monetary crank") who doesn't believe in cause-and-effect, but does believe in magic.

And let's see. Lonergan manages a hedge-fund and wants the Fed to print money and hand it to private individuals to "increase equity holdings" and "decrease inequality." Nah! No self-interest on his part! His only concern is for the poor.

Hey, Lonergan, I have an idea. Since you actually believe the nonsense that consumer spending is ultimately what drives the health of an economy (it isn't, but that's beside the point), why rely on the government to print up money and distribute it? They'll only botch the job anyway, just as they do with everything else. Why not simply hand out federally approved printing presses to all private citizens below a certain income level and tell them to print up as much money as they want – er, uh, I mean "need"? That would stimulate consumer spending and decrease inequality just as much as having some central authority like government do the printing and distributing, right?

It took me years to realize and accept the fact that accountants, bankers, financiers, hedge-fund managers, and finance people in general (including financial journalists) understand less about economics than almost anyone else.

But thanks to the fractional reserve principle, new money *continually* enters the economy “ex nihilo” -- EVERY time a bank (central or local) makes a new loan. It then poofs out of existence (except for the specter of interest) when the loan is repaid. That’s the way debt-based currency works. I think the essence of the author’s point is simply that more of the benefit of this fiat money should fall on those at the base of the pyramid rather than primarily those at the apex - where it tends not to “trickle down” very far.

Point well made Khakuda. Like most systems, fiat money can be run well or run badly. But we have to move beyond this point. It is obviously true: The difference between Zimbabwe and Switzerland is not fiat money, or money printing - both countries print money and have fiat money regimes. What Mark & I are proposing is adding a tool to the armoury of central banks operating under a fiat money regime, so that they can be more effective in combatting deflation and recession.

So many governments in the UK since the early Seventies have allowed the private banks to blow house price bubbles you may as well rename Great Britain as Big Bubble Britain! So what's the answer to stop house price inflation stop the private banks lending to anybody and by the same token stop sovereign governments creating fiat money because they also create inflation? If you did there'd be no money for growth of the economy. An outright ban on both money creation agencies creating is just plain dumb! Let's hear your solution!

Well said, Khakuda. To put it even more simply, why not just print up $3 million for every family and allow us all to retire? Those who want more could work if they want. When you take the thought experiment to its logical conclusion, you see how silly it is.

Good question, and always worth defining. I think we would be wrong if there was an increase in inflation and no increase in output or a fall in output. I think that is close to a zero probability in the Eurozone. One way to protect against this risk is to start with a modest transfer - we are suggesting 1-3% of GDP. This is a fraction of the money printed under QE in the US (which caused no measurable impact on inflation). If say a 3% of GDP cash transfer in Europe caused 3% inflation and no change in growth, the policy would end. I should stress however, that the policy we are recommending is far less risky than those currently being pursued. We have for example almost no precedent for negative interest rates, and many serious economists are extremely concerned by the 20% of GDP increase in base money created under QE. Our proposal suggests a fraction of this.

"Purchasing power" is the ability to buy things. If the Fed transfers cash to me, my purchasing power rises. At the aggregate level, this should only be inflationary if the economy is operating close to full capacity. Otherwise, output and employment will rise. Expectations are important. If firms think it is temporary they will take this into account. If they think the central bank will keep doing it until demand persists at a level consistent with the central bank's inflation target, then logically that is what they will expect.