Effect of Heli’s on Credit Markets

Lowering interest rates to stimulate AD and inflation undermines the effectiveness of the credit markets. Credit can be stimulated in two ways. Higher AD stimulates credit primarily through higher profits and income. Lower interest rates stimulate credit primarily through lower interest costs. It is better if credit responds to higher income and profits because it has greater guidance as to where to go to most profitable areas. Therefore lending can be more effectively channeled. Lowering rates is a broad lending stimulus, which encourages greater levels of lending to all areas including more speculative ones. Consequently interest rate stimulus makes lending of a more speculative nature because lenders have to anticipate to a greater degree where the most profitable areas will be. Increasing lending to areas that have realized increases in profits/income makes lending less speculative in nature. An inefficient lending system will result in lower real GDP growth and an increasing debt to GDP ratio due to higher levels of malinvestment and speculation.

Heli’s are the optimal monetary policy instrument to improve the function of the credit system because they generate aggregate demand by increasing monetary wealth of people without needing stimulus from lowering of rates.

Heli’s could send interest rates higher or lower depending on the relative changes in income, inflation and loanable funds caused by heli’s.

The E-money Helicopter Drop Proposal (Brief)

Two basic central bank reforms to increase monetary policy effectiveness, equality and reduce systemic risk:

1. Extend the provision of electronic deposit accounts or e-money by the central bank (CB) to all people and other entities instead of only depository or financial institutions. The CB is tasked with providing the supply of money and should therefore also provide an efficient electronic means of making payments and depositing the money it creates. Physical notes, coins and commercial bank deposits or other forms of broader money will continue to exist in their current form.

2. Incorporate new policy tools so the monetary authority can attain its targets more effectively and equitably.  The key tool is the e-money helicopter drop. When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can periodically expand the supply of central bank e-money directly and evenly into all citizen’s accounts through helicopter drops. Other policy tools such as the ones currently employed may also utilized when optimal. The rate of monetary growth through helicopter drops to the public should be periodically adjusted by the central bank in order to attain its targets while it may also conduct temporary open market operations or issue securities in order to fine tune the short term interest rate or contract the monetary base. E-money heli-drops  would represent a more effective version of helicopter drops because central bank independence is not compromised. New legislation would need to be crafted to allow central banks to perform e-heli’s including strict limitations on how e-heli’s are performed.

Principle benefits of proposal

E-helis stimulate spending through higher monetary wealth of e-heli recipients. As a result of higher monetary asset wealth from heli’s lending will also be stimulated due to improved creditworthiness as well as an increase in loanable funds. Heli’s are superior to current interest rate targeting tools because they generate spending stimulus independently of the credit channel while simultaneously stimulating credit. Therefore dysfunctional credit markets or banking systems should not affect the operation of monetary policy.

Helicopter drops of central bank issued e-money allow the central bank to conduct helicopter drops in order to stimulate the economy without requiring the cooperation of the fiscal arm of the government. This would simplify the process of performing heli-drops and remove any conflicts of interest that may arise from undermining central bank independence.

Heli’s stimulate investment by increasing spending and hence income. Higher AD will stimulate investment as entities compete for income. Heli’s avoid increasing speculation through excessively stimulating credit into an environment of low growth in which investment is not appealing due to low demand.

If e-money is accounted for as a type of equity and not a liability on the balance sheet at creation issues of central bank solvency are less of a concern and wont require additional government borrowing or taxation in future due to budget constraint. Issuance of money by a government entity to its constituent is most accurately accounted for as equity. This is somewhat similar to a corporation issuing stock to existing shareholders. If e-money is recognized as equity the central bank can issue the quantity of money required to achieve targets without needing to purchase assets. Under current system the central bank buys assets such as bonds which are claims on the money it creates issued by another government branch so money currently has no real backing. Ultimately the true backing of fiat money is effective and accountable management of the monetary system leading to a strong economy.

There is no zero bound problem to address under heli’s.

In a climate where the short term interest rate is at the zero lower bound (ZLB) the current central bank counter-parties have very little or no opportunity cost when holding reserves due to low investment returns and therefore expansions of central bank money should have a reduced impact on growth and inflation. The overall public on average have a higher opportunity cost when holding money compared to central bank counter-parties due to foregone utility from consumption or other spending. This is especially true of the unemployed and people with low incomes and little to no wealth. Therefore expansions of funds to public would more effectively create growth at the ZLB.

The wealth effect as a result of portfolio re-balancing will continue to manifest as it does at present but an additional wider reaching increase in wealth will also prevail under e-helis through increased money balances of central bank counter-parties. Asset holdings are concentrated with the wealthier people owning a large proportion of assets and many people owning few or no assets. Therefore under the present system increases in wealth from increased asset prices don’t reach large parts of the population which diminishes the effectiveness of monetary policy. Wealthier people’s propensity to spend out of income is lower than the average person therefore monetary policy induced increases in wealth of all people through money issuance should result in greater spending increases when compared to wealth increases skewed towards wealthier people.

Greater systemic safety and efficiency through economies of scale of the deposits and payments system will be realized if people can also directly deposit and transact in central bank e-money which is risk free electronically alongside commercial bank deposits. The central bank can offer depository services for the public interest. Commercial banks are profit oriented which can compromise the level of service provided to depositors.

A system whereby the general public directly interact with the central bank will instill greater levels of confidence in the central bank. People should also become more educated in monetary issues if they directly interact with the central bank.

What backs money?

The most important element in creating money demand is the competence of issuer and accountability. Competence is largely composed of setting targets and effectiveness of tools used. Accountability assures people hat the monetary system is run in the interests of the public.

That’s the backing, not a metal that if the system collapses you cant usually redeem anyway.

What fundamentally backs money in the long run is transactions money demand. Taxes create some demand. Without taxes people would still demand money because of its usefulness in making payments. Taxes can undermine the monetary system if excessive or if fiscal policy is poor.

CB tools for temporarily or permanently contracting the monetary base without asset sales

In order to manage short term fluctuations in money demand which will affect it’s targets the central bank will need to temporarily grow the monetary base below trend or contract the monetary base. When temporary contractions are required the CB can use existing facilities such as reverse repurchase agreement or issue it’s own securities similar to treasuries.

Permanent contractions of the MB are unprecedented and seem unnecessary. A permanent contraction of MB will result in lower growth as well as inflation so the real effect will be zero. If necessary though the central bank can very effectively permanently contract the the MB. This can be done through directly imposing transaction costs/taxes on the economy using the taxation office as its collection agent  just as the executive arm of government does at present. There would be strict conditions on when and how the central bank could impose this form of tax in such a rare circumstance.

Direct taxation by the central bank would be a highly effective method of contracting the monetary base. As an example a 2% income tax on all income earners over a one year period in Australia would contract the monetary base by approximately 35%.

It bears considering whether taxation should be one of the primary short term contraction tools of a central bank due to how effective it is in removing money from circulation and directly affecting economic variables. An incremental trial of the tax policy tool to ascertain its effectiveness should be beneficial. Direct taxation may be more effective in affecting demand because it directly affects incomes and prices of goods and services or labor instead of investment money flows when the central bank issues securities

In this instance taxation would be a monetary policy tool because it would be used by the central bank to affect the money supply and destroy money, not for funding of spending.

Central Bank Accountability and Independence

Central bank governors and/or directors should be elected through a public vote and not appointed by other arms of government. The CB should also be independent of the legislative body if it adheres to its targets. Central banks should set clear policy targets. When the central bank deviates from its economic objectives for a defined period of time an established parliamentary body can call on governors to explain their actions. If these actions are inappropriate governors can be fired and new governors publicly elected. Limits on how many governors of the board can be replaced per year can be imposed in order to limit uncertainty. Incentives should also be put in place for achieving targets.

A parliamentary committee with no party affiliation could be elected to make CB governors accountable if they don’t perform their objectives. This committee may also have other responsibilities possibly relating to regulation of financial markets, auditing or banking.

It may be worth considering if beneficial to require a basic level of monetary education or experience for voters to be permitted to vote for central bank governors. Such an education could be provided at no cost possibly at the secondary level (high school) of education.

The CB may fund itself by printing all the money necessary to underpin its operations in a transparent and accountable manner or it may impose an annual fee on citizens. This fee could be deducted from the heli drops the public receives so that people don’t pay fees they just receive an small reduction in the amount of money received through the heli drop.

Monetary Policy which includes managing the nation’s money and payments system is an important task that requires its own dedicated institution. The monetary authority should be recognized as a separate arm of government and be fully independent from the executive arm of the government much like the judiciary or legislature. Conflicts of interest may arise when the central bank loses its independence. Political interference of monetary policy by the executive or legislative arm of government will adversely affect its performance. Under an independent central bank monetary policy can’t be manipulated ahead of elections, or to support political aims. Money system should not be captive to politicians.

If other arms of government also have to perform monetary policy it will concentrate too much responsibility under the executive or legislative arm of government and increase the amount of tasks needing to be managed by a these entities. This will confuse or reduce the focus required to effectively manage the monetary and payments system which will result in inferior management outcomes. For example sometimes the government may invest in unnecessary infrastructure just to increase the money supply, not because the infrastructure is needed. Government should focus on fiscal policy and regulations in order to create most efficient economic system. Central bank should manage monetary policy in order to create most balanced, stable and efficient monetary system to underpin the efficient functioning of real economy. Specialization makes for more effective policy making.

Less confusion or obfuscation and greater accountability will prevail if monetary authority is solely responsible for monetary policy.

What is the proper balance sheet recognition of money?

Money is a a financial asset issued by the central bank. Like any financial asset it may be recognized as an asset or a liability of issuer.

If the money issued is a promise to pay a certain amount of a commodity such as gold then the money should be recognized as a liability. In a fiat money system there is no promise to pay anything to holder of money so it generally should not be a liability. If money is issued to the people who are the central bank’s constituent it should be recognized as a form of equity.

Recognizing money as equity is beneficial in the sense that the central bank can print money in accordance to its targets without the balance sheet going negative. If money is a liability issuance of money increases a bank’s liabilities. In order to offset this the central bank expands money through asset purchases. Under an equity money system the bank can operate tools such as e-money heli-drops without needing to purchases assets which simplifies policy-making.

The issue of money backing arises if no assets are being purchased when expanding money. Credibility of issuer in terms of competence and accountability are the true backing of money. In event of collapse central bank assets like gold should not be accessible anyway to money holders so any physical backing is questionable. Under current fiat system one possible backing is the financial assets such as government bonds the CB purchases when conducting monetary policy. This is a dubious backing anyway because government bonds or similar instruments are claims on the money the central bank can print without limit. The monetary authority may continue to hold assets such as gold on its balance sheet but further issuance of money should generally not require an expansion of central bank asset purchases.

Balance sheet issues may arise if the central bank wishes to retract money through issuance of liabilities such as reverse repo, interest on reserves or bonds. This can easily be overcome by printing money and placing it on balance sheet of bank in an equal amount to its issued liabilities so that the balance sheet equals out.

E-money Heli-drops as permanent income

One of the main forms of resistance to helicopter drops by critics is that under the permanent income hypothesis of consumption one off helicopter drops which constitute temporary income wont affect spending because of consumption smoothing. If E-money heli’s are made a primary monetary policy tool they will actually constitute a permanent form of income so that consumption is affected.

Heli-drops: the most effective tool at managing expectations

Under policy tools such as quantitative easing (QE) the fed is trying to stimulate the economy by expanding the monetary base (MB). The fed has expanded the MB at an unprecedented pace and still has not reached its target inflation rate. Some people say it is because of some actual risk of expanding the MB further which may or may not be true. Others say there is no risk and the central bank should just further expand the MB and it will hit its target inflation rate. These people also say that the fed isn’t expanding further and hence lowering its inflation target because it may be perceiving a risk that doesn’t actually exist.

This is where helicopter drops as a policy tool are superior. In order to achieve the same rate of inflation as is currently being achieved the MB would of only increased at a moderate rate far below what we have observed since QE began. Therefore risks whether perceived or real as a result of a massive expansion in MB wont exist and the fed wont lower its inflation target.

Money demand amongst the general public is more stable when compared to the current counter-parties at the zero lower bound (ZLB). This is because at the ZLB central bank counter-parties have very little or no opportunity cost when holding money due to low investment returns. The overall public on average have a higher opportunity cost when holding money at the ZLB due to foregone utility from consumption or other spending. Banks are oriented towards realizing profits from investing and inter-mediating whereas people gain greater relative utility from consuming. Individuals which are unemployed or of low wealth have very stable and low speculative money demand. Therefore expansions of funds to people broadly would more effectively affect expectations, create inflation and spending growth at the ZLB.

Heli drops are more effective at managing expectations compared to interest rate targeting. The effectiveness of a reduction in interbank interest rates in affecting expectations is dependent upon people’s willingness to borrow and bank’s capacity to make loans or investments. Factors such as debt to GDP levels and balance sheets of debtors and creditors can severely hamper the effectiveness of interest rate targeting as a policy tool.The limited direct reach of this instrument is one of its main shortfalls. Adjusting interest rates only directly affects entities which are currently indebted and others who wish to borrow. Interest rate targeting will also be ineffective in instances where the demand for credit is low or in circumstances of disintermediation. Heli drops affect all people not only the indebted or people wanting to borrow.

Incorporating New Monetary Policy Tools for Greater Effectiveness, Equality and Stability

Daniel Kruppa, 24 December, 2014

At present monetary policy (MP) is performed by major central banks by means of policy instruments such as fixing or targeting of a specific short term interest rate, asset purchases and sales, exchange rate management, interest on reserves and forward guidance. The current tools have their limitations which limit the effectiveness of policy-making.

Altering the cost or quantity of money and purchasing assets from the marketplace can potentially affect spending primarily through changes in funding costs, increases in the supply of money and wealth effects through portfolio re-balancing (Bank of England 2011).

Interest rate targeting is one of the principle tools employed by central banks in monetary policy. The effectiveness of a reduction in interbank interest rates in generating spending is dependent upon people’s willingness to borrow and bank’s capacity to make loans or investments. Factors such as debt to GDP levels and balance sheets of debtors and creditors can severely hamper the effectiveness of interest rate targeting as a policy tool.The limited direct reach of this instrument is one of its main shortfalls. Adjusting interest rates only directly affects entities which are currently indebted and others who wish to borrow. Interest rate targeting will also be ineffective in instances where the demand for credit is low or in circumstances of disintermediation. Issues of inequality may also arise because direct counter-parties to central banks usually have access to lower borrowing costs than the rest of the marketplace.

The wealth effect as a result of portfolio re-balancing which is generated through asset purchases and interest rate targeting only reaches existing asset holders and because asset ownership is heavily concentrated most of the wealth effect is experienced by the most wealthy while people with few or no assets experience little to no wealth effect. The richest may also have a lower marginal propensity to consume than people on average, therefore the impact on spending as a result of the wealth effect is reduced. It is also a manifestation of inequality that monetary policy seeks to create wealth increases but these increases in wealth mainly go to richer people. Inequality of asset holdings can be observed in the US where over 90% of stocks are owned by the wealthiest 20% while the bottom 60% own approximately 2.5% of stocks (Wolff, 2012). Approximately 65% home ownership rate leaves approximately one third of households not experiencing the wealth effect of house price increases (US Census Bureau).

The effectiveness of policies which expand the money supply such as quantitative easing or open market operations depend on the money demand of central bank counter-parties. Interacting with entities which have a money demand which fluctuates greatly makes its harder for the central bank to attain its targets. For example If the monetary authority expands money to entities which have a very elevated demand for money at the zero lower bound expansions of liquidity will have a diminished effect on growth and inflation. Consequently the central bank will have to resort to large expansions of the monetary base or unconventional policies which increase the difficulty of attaining its goals.

A more effective monetary policy toolkit

The central bank should bring into effect new tools so it can more effectively allow attain its economic targets such as GDP growth or inflation while minimizing inequality.

Fortunately options exist to incorporate new tools which can address the shortfalls of the of existing policy instruments. The instrument with the most potential to increase policy effectiveness and equality is the helicopter drop of e-money.

This form of helicopter drop is superior to interest rate targeting in terms of efficiency because it will directly affect all people regardless of whether they are in debt or not, without being reliant on credit markets or bank intermediation to operate.

Helicopter drops will generate a more balanced wealth effect by increasing money balances of all people. Policy needs generate a direct wealth effect to all people instead of only existing asset holders to improve economic outcomes.

Money demand amongst the general public is more stable when compared to the current counter-parties at the zero lower bound (ZLB). This is because at the ZLB central bank counter-parties have very little or no opportunity cost when holding money due to low investment returns. The overall public on average have a higher opportunity cost when holding money at the ZLB due to foregone utility from consumption or other spending. Banks are oriented towards realizing profits from investing and inter-mediating whereas people gain greater relative utility from consuming. Individuals which are unemployed or of low wealth have very stable and low speculative money demand. Therefore expansions of funds to people broadly would more effectively create inflation and spending growth at the ZLB and simplify policymaking.

The money supply to the broader economy could increase without necessitating an increase in debt if the central bank expands the monetary base directly to people. Under the current system expansions of broader money generally require more borrowing because commercial banks usually increase the quantity of deposits through lending. If the money supply can increase while maintaining lower debt to GDP levels greater financial stability should prevail because historically credit booms raise the odds of a financial crisis (Jordá et al. 2014).

In order to conduct e-money helicopter drops the central bank will need to extend the provision of electronic money to all entities not just depository institutions. It is not proposed that private banks cease to be depository institutions or full reserve banking be implemented. If the CB is tasked with providing money it should therefore also provide an efficient electronic means of payments and deposits of the money it creates. The provision of a payment and depository system by the central bank will be beneficial because it will directly be able to interact with people for monetary policy purposes which will remove problems caused by bank disintermediation and the deposits and payment system which is systemic will become risk free. Central bank provision of e-money will continue alongside the provision of physical currency and other forms of broader money issued by banks such as demand deposits.

If the central bank offers depository and payments services through e-money this systemic aspect of the economy will become risk free. Deposit insurance provided by the government for the private sector may no longer be necessary or less of a requirement.

Economies of scale should be realized if the current depository and payments system is unified and streamlined under the central bank instead of being segmented among an array of private banks and clearing houses. As a result the depository and payments system should become simplified and less costly to operate.  Efficiencies of scope should also prevail if basic banking functions such as the deposits, payments and monetary policy are integrated. People will have the choice to deposit money with the central bank or private companies serving their own profit interest.

If people participate in monetary policy as counter-parties to the monetary authority they should become more knowledgeable of economics and gain greater confidence in the monetary system and its key institutions which is vital for a healthy economy.

When the CB expands money into the economy without purchasing assets it will not remove safe assets and risk free returns from the private sector which may induce excessive risk taking. Issues relating to collateral shortages, unwinding of asset purchases or other possible adverse effects on asset markets from expanding the CB balance can be avoided.

In a dynamic stochastic general equilibrium model with rational agents maximizing utility over an infinite time horizon subject to inter-temporal budget constraints an increase in net wealth through helicopter drops would cause agents to increase their current and future spending if there are unemployed resources (Bossone, 2013).

How will monetary policy be conducted through the new instruments?

When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can affect the target interest rate (if interest rate targeting) by periodically expanding the supply of central bank deposits directly and evenly into all citizen’s accounts while open market operations and other policies are performed when necessary. The rate of growth of e-money helicopter drops will be periodically adjusted by the central bank in order to attain its targets while open market operations or security issuance may be employed in order to fine tune the short term interest rate or contract the monetary base.

When the money supply is expanded to the public it may be directly issued into all people’s accounts on an equal basis at regular intervals such as once a week. The growth rate of the money supply will be adjusted in order to attain the target interest rate, inflation or GDP growth rate. Historically in most of the first world prior to the 2008 financial crisis the growth rate of the monetary base was approximately 5% per anum. If the central bank grows the money base directly to people at 5% per anum and due to liquidity effects is causing the short term interest rate to be too low too the rate of money growth should be slowed and vice versa.

During periods when the central bank needs to contract the money supply this can be done through issuance of securities such as reverse repurchase agreements, term deposit facilities or issuance of liabilities. Historically contractions of the monetary base have been rare and short term, most of the time the MB is increasing. The central bank may also employ temporary open market operations in order to fine tune the interest rate target if necessary as is currently performed.

The people are the central bank’s constituent due to it being a public agency. Therefore issuance of money to people should be recognized as a form of equity on the bank balance sheet. The expansion of money will not deteriorate the balance sheet of the central bank if money is not recognized as a liability. Financial assets or fiat money do not need to be a liability of the issuer and is an asset for its holder (Buiter, 2004), therefore the monetary base through direct public issuance can expand without a corresponding increase in liabilities for the central bank.

References

Bank of England (2011), “Quantitative easing explained: putting more money into our economy to boost spending”, London: Bank of England.

Bossone, B and A Sarr (2002), “A new financial system for poverty reduction and growth”, IMF Working Paper No. 02/178, October.

Bossone, B (2013), “Unconventional monetary policies revisited (Part II)”, VoxEU.org, 5 October.

Buiter, Willem H (2004), “Helicopter money: irredeemable fiat Money and the liquidity trap”, CEPR Discussion Paper 4202.

Òscar Jordá, Moritz Schularic and Alan M. Taylor (2014), “Private Credit and Public Debt in Financial Crises”, FRBSF Economic Letter, March 10, 2014

Wolff, E. N. (2012), The Asset Price Meltdown and the Wealth of the Middle Class. New York: New York University.

The E-money Helicopter Drop Proposal (Brief)

Two basic central bank reforms to increase monetary policy effectiveness, equality and reduce systemic risk:

1. Extend the provision of electronic deposit accounts or e-money by the central bank (CB) to all people and other entities instead of only depository or financial institutions. The CB is tasked with providing the supply of money and should therefore also provide an efficient electronic means of making payments and depositing the money it creates. Physical notes, coins and commercial bank deposits or other forms of broader money will continue to exist in their current form.

2. Incorporate new policy tools so the monetary authority can attain its targets more effectively and equitably.  When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can affect the target interest rate (if interest rate targeting) by periodically expanding the supply of central bank e-money directly and evenly into all citizen’s accounts through helicopter drops. Other policy tools such as the ones currently employed may also utilized when optimal. The rate of monetary growth through helicopter drops to the public should be periodically adjusted by the central bank in order to attain its targets while temporary open market operations or securities issuance may be employed in order to fine tune the short term interest rate or contract the monetary base. E-money heli-drops  would represent a more effective version of helicopter drops because central bank independence is not compromised. New legislation would need to be crafted to allow central banks to perform e-heli’s including strict limitations on how e-heli’s are performed.

Principle benefits of proposal

The various stimulatory or contractionary effects as a result of adjustments in the money supply and hence interest rates will continue under helicopter drops with the addition of new direct mechanisms of action through increased public nominal monetary wealth. E-helis will nominally increase monetary wealth of recipients by the amount of newly created money. Under asset purchases or lending the newly created money received by the central bank counter-party does not result in an increase in wealth because it is offset by a new liability or the loss of an asset. Portfolio re-balancing may induce a wealth effect under tools such as quantitative easing, but helis have the added benefit increasing monetary wealth while also inducing the re-balancing effect.

Helicopter drops of central bank issued e-money allow the central bank to conduct helicopter drops in order to stimulate the economy without requiring the cooperation of the fiscal arm of the government.

If e-money is accounted for as a type of equity and not a liability on the balance sheet at creation issues of solvency central bank are less of a concern. Issuance of money by a government entity to its constituent is most accurately accounted for as equity. This is somewhat similar to a corporation issuing stock to existing shareholders. If e-money is recognized as equity the central bank can issue the quantity of money required to achieve targets without needing to purchase assets. Under current system the central bank buys assets such as bonds which are claims on the money it creates issued by another government agency so money currently has no real backing. Ultimately the true backing of money is effective and transparent management of the monetary system leading to a strong economic system.

In a climate where the short term interest rate is at the zero lower bound (ZLB) the current central bank counter-parties have very little or no opportunity cost when holding reserves due to low investment returns and therefore expansions of central bank money should have a reduced impact on growth and inflation. The overall public on average have a higher opportunity cost when holding money compared to central bank counter-parties due to foregone utility from consumption or other spending. Financial entities such as the current central bank counter-parties are oriented towards realizing profits from investing and inter-mediating whereas people gain greater utility from consuming. Therefore expansions of funds to public would more effectively create growth at the ZLB.

The wealth effect as a result of portfolio re-balancing will continue to manifest as it does at present but an additional wider reaching increase in wealth will also prevail under e-helis through increased money balances of central bank counter-parties. Asset holdings are concentrated with the wealthier people owning a large proportion of assets and many people owning few or no assets. Therefore under the present system increases in wealth from increased asset prices don’t reach large parts of the population which diminishes the effectiveness of monetary policy. Wealthier people’s propensity to spend out of income is lower than the average person therefore monetary policy induced increases in wealth of all people through money issuance should result in greater spending increases when compared to wealth increases skewed towards wealthier people.

Under the present system central bank actions designed to create a wealth effect throughout the economy are not guaranteed to succeed if asset markets don’t appreciate in response to expansionary monetary policy. e-helis will increase people’s monetary wealth even if asset prices don’t change.

Increased public wealth in form of liquid assets such as money is more likely to be used for spending than an increase in wealth in form of less liquid assets such as stocks or housing. Increase in wealth from less liquid assets should lead to a smaller increase in spending due to taxation from capital gains, transaction costs and effort of converting non liquid wealth into money in order to spend.

The money supply to the broader economy could increase without necessitating an increase in debt if the central bank expands the monetary base directly to people. Under the current system expansions of broader money generally require more borrowing because commercial banks usually increase the quantity of deposits through lending. If the money supply can increase while maintaining lower debt to GDP levels greater financial stability should prevail. Monetary policy effectiveness will not be compromised in an instance of a credit crunch or other forms of dis-intermediation if the central bank can directly interact with economy more broadly.

Greater systemic safety and efficient through economies of scale of the deposits and payments system will be realized if people can also directly deposit and transact in central bank e-money which is risk free electronically alongside commercial bank deposits.

A system whereby the general public directly interact with the central bank will instill greater levels of confidence in the central bank. People should also become more educated in monetary issues if they directly interact with the central bank.