Afternoon Must-Read: Adair Turner: Printing Money to Fund Deficit Is the Fastest Way to Raise Rates

…The International Monetary Fund seems to answer with forked tongue. Its latest World Economic Outlook urges that monetary policy should stay loose to stimulate growth. Yet its Global Financial Stability Review warns that loose monetary policy risks creating financial instability…. In fact the best policy is to print money and raise interest rates. That sounds contradictory, but it is not…. Most countries have opted to combine fiscal tightening with ultra-loose monetary policy, setting short-term interest rates close to zero and using quantitative easing to reduce long-term rates and boost asset prices. But… sustained low interest rates create incentives for highly leveraged financial engineering…. The Bank for International Settlements therefore argues that monetary policy should be tightened as well as fiscal, but that would depress demand yet further.

We should indeed seek a swift return to higher interest rates, to remove the dangerous subsidy to high leverage…. The best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply. Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly…