Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 18 February 2013 at 22:11 GMT

The Chicago Plan - are you ready for the real helicopter money?

Chief Economist & CIO / Saxo Bank

Over the last several months, The Chicago Plan keeps popping up in the media – a bit under the radar, but the A-list of people who have circulated this concept now and historically include Henry Simons, Irving Fisher, Milton Friedman, Keynes himself, Bernanke, and last August Benes & Kumhof in an IMF working paper – The Chicago Plan Revisited. Remember that the IMF is the policy maker’s policy maker, or the overlords of dirigisme, if you will.

The Chicago plan idea got additional fuel recently when Lord Turner, Chairman of the FSA, defended the plan in an interview – This time it’s different. Here a is video link with one of the authors: Michael Kumhof.

The so called plan is simple: “Wipe out debt by legislation by using state created money to replace the private banking system” (ZH link), or as Ambrose Evans-Pritchard put it so well in the Telegraph: "The conjuring trick is to replace our system of private bank-created money - roughly 97 per cent of the money supply - with state-created money." The key features of the plan are the requirement that banks put up 100 per cent reserve backing for deposits, while at the same time stripping the banks of their ability to create money out of thin air”.

The original plan was created in 1936 by Professors Henry Simons and Irving Fisher during the US Depression. The original paper looks at how money created by credit cycles leads to a damaging creation of wealth. The Keynesian call on Friedman and Bernanke who both have supported the “idea”: Milton Friedman invented the term “helicopter money” – in his “The Optimum Quantity of Money” in 1969 and we have all by now read Bernanke’s helicopter speech from 2002.

It was also in turn supported by Martin Wolf in FT: 

Finally, some common sense this morning from Gavyn Davies also in the FT.

The Gavyn Davies piece covers the following points concerning the Chicago Plan and the idea of Overt Monetary Financing (OMF):

1. The key difference is that in the case of QE, the bonds are (in theory) only parked temporarily at the central bank, while under OMF the purchases are never intended to be reversed – in other words, while central banks can pretend that QE is not printing money – OMF dispenses with the pretense – it is pure printed, “helicopter” money.

2. A second difference is that, in the Turner version of OMF, there is a “breakage of the link between the government’s decision to run a budget deficit, and the public’s willingness to finance deficits at acceptable interest rates” . This means that the policy requires co-operation between the fiscal and monetary authorities (or a melding of the two), while QE is built around the idea that the two policies are determined at arm’s length due to the nominal independence of the central bank.

3. Finally “Because it does not tap private savings, OMF financing will be much more expansionary than QE on a dollar-for-dollar basis. Supporters of OMF, like Lord Turner, see this as an advantage, and say that it means that the medicine would need to be applied in much smaller doses than QE. The possibility of introducing OMF in small doses, controlled by the central banks, is seductive: supporters argue that not all roads necessarily lead to Zimbabwe.”

My comments:
It all sounds so innocuous, these policy making tools: It starts as a small experiment – you know, just to test the waters. Other policy measures have been rolled out in this fashion: The V.A.T started at a small 2% - then suddenly it morphs into a 25% albatross, like in Denmark – or the ECB steps in to “save the Euro” but then all of the sudden it’s bankrolling all of the debt in Europe. Under a Chicago Plan scenario, fiscal- and monetary accountability and anchoring would disappear – and the most dangerous thing is that it will appeal to many stakeholders in theory. Eventually, the danger is again that our policymakers make David Copperfield’s grand illusions look like childs play as this would make an illusion of our entire monetary system – extend and pretend to the next dimension.

Make no mistake – this is privately what Bernanke, Draghi and Carney believe could be done, if (don’t we all know that it is “when” and not “if”?), the politicians again fail to create the needed reform. 2013 looks like a big transition year. Fed officials are bravely talking up an exit from QE – but only because they believe the economy is set for a strong rebound. If it isn’t and we don’t start seeing signs of needed reform, we’re simply going to descend to another ring lower in the monetary/central planning inferno.

While we may have high stock market prices the real economy continues to disappoint: World plunges into recession in Q4-2012 – so get ready for some more monetary experiments?

If the history since the advent of QE is any guide, we are only a few quarters away from all having to understand the Chicago Plan, as politicians haven’t even taken baby steps in the right direction toward structural reforms – though is that simply because the voters can’t handle the truth of what is needed?

Safe travels,


For an educational tour here is excellent link from And here is another primer on the idea.

benlouro benlouro
Do not forget that in countries like Portugal and Spain (under austerity plans) the helicopter is not dropping money on people but actually the opposite. So over time these "incredible plans" of printting money, will only create more and more mistrustfulness around the world and in between countries. do not also forget what reasons led to WW2...
goldfinger goldfinger
Good point Benlouro, but I've been thinking that for a while. When the world worked out that there weren't any more trailers to lend too, then we were all in trouble. There are large portions of the populations of all western countries that are becoming more and more marginalized. That may not bother a day trader, but historically led to............ Politicians, wake up!!!! Unlikely, they are waiting on Bunga's re-election and party time. If I had my time again, I would certainly want to be a party animal. Bonne nuit.
goldfinger goldfinger
Steen,great piece. Which prompted me to think about my wife's perception on what is going on. I have to say this is after major chastisement for apparently making mistakes over past few years. Apparently, she saw all this coming. I'd love to have her crystal ball! But in a moment of great frustration she said"If the bank has bought all this debt, and you say they can't put it back into the market. Why can't they just get rid of it". That might sound horribly simplistic, but how do central banks begin to shrink their balance sheets without completely killing the economy.
It's going to take years to get the real economy back to something like normality. I'm not talking large co's., I'm talking about the small guy. And the more I thought about it, the more one could see that the end game will be....answers on a post card please. But... beware a global Weimar republic situation. I really hope I am overly pessimistic, but I think not....
fxtime fxtime
Longer dated bonds simpoly permits governments cheap loans...rates this low it seems sensible to take advantage of them and extend the average maturity to ease cash flows to a point (go to far and the debt becomes unsustainable in repayments etc, etc) however the crux of the issue is whether the buyers keep faith in the issuer to repay in a timely manner and is the inderwriting currency of a stable value. Fiat paper money is at the end of the day simply paper that people bestow value on....if the trust/value dissipates we have a Weimar situation again. Deflation is another issue to consider too....but long dated bonds only work for governments if we have inflation as this erodes the debt value faster than the interest charge so a longer dated bond sounds great but is in itself a gamble IMHO.
fxtime fxtime
It does surprise me that governments don't consider their tax regimes as being counter-productive to economic growth....there were times when PAYE or VAT didn't exist and corporations paid a higher share of tax but the emphasis is now more on easier direct taxation to employees, VAT and saving taxes. There is no real benefit for people to consider investing hard earned money into anything as they know they will incur a punative tax at some point....would economies grow faster if VAT was reduced back down to say 15% ? Could governments survive on this lower tax level? Could PAYE be simplified to reduce the sheer number of civil servants likewise corporation tax? The USA used to boast that unlike the UK their tax regime was designed but now I suspect both sides of the pond are chaotic.
Steen Jakobsen Steen Jakobsen
Gr8 comments all - this could be the most important "conversation" we will have this year - Remember when Operation Twist was only a thought? I think "helicopter" money is only months away unless something dramatic happens - Lord Turner argues himself: "...this is a medicine in small quantities but a poison in large quantities" - the concept at policy maker will only need one shot is simply naive - What concerns me even more: Where is the talk about good old values? Morale Hazards - paying ones debt - Goldfinger your wife is probably the best "economist" u will ever meet - I truely believe that. I'm a crap economist - only comfort is 90% of everyone else is worse :-)
Juhani Huopainen Juhani Huopainen
As Bridgewater's Ray Dalio explained, there are only three ways to get away from debt excess: austerity, growth and inflation. Either one of these alone will not be effective and counterproductive, what is needed is all three in moderate amounts.
Juhani Huopainen Juhani Huopainen
And then the too large debts: austerity is counterproductive, we've already seen it in action. Greece's debt is now larger than before the largest sovereign haircut in the history, and the official sector has been burdened by hundreds of billions. Is the Greece solved? No.
When it comes to too large debts, there are only two real choices: part of the debt is cancelled, hurting the creditors, or it is monetarized, hurting everyone equally. The moral hazard comes from this trade-off: why should the Finns or the US (IMF) bail out German banks because of the bad investments they made? The debate on whether it is better to cut the debts or monetize them is the real McCoy. Nobody knows, systemic risk or moral hazard, what's your preference?
benlouro benlouro
very good point Juhani. and we all can say that: the worst is over... the economy is doing fine... stocks are cheap...but we all know that is not true and even the Biggest Bazzucas of central banks can not fight (for real) : recessions, unemployment and most important: Trust.


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