Hetzel is trying to demonstrate that the Federal Reserve can still influence aggregate demand even when the interest rate is against the lower bound (0%). Unfortunately, his irrefutable, logical conclusion is actually quite refutable and illogical. In Hetzel’s theoretical world, individuals willingly part with all of their assets (food, clothes, shelter, etc) in order to receive non-interest-bearing money from the government. Since the central bank owns all of the assets, individuals are then forced to purchase goods back from the central bank. (An aside: How does the central bank choose the price to charge?) While this certainly does stimulate expenditure, since individuals could not otherwise survive, history and logic suggest this moment could never arise. Using the same basic premise, here is a different possible conclusion:
A central bank decides to engage in unlimited open-market purchases. After parting with many/most of their assets, individuals realize that without food (assets) they will be unable to survive. These individuals resist exchanging their remaining sustenance for non-interest-bearing money. Working backward from that endpoint, individuals will begin to hoard physical assets. As other individuals try to purchase goods with money, the money price of assets will rise dramatically (money is devalued). The central bank’s actions will stimulate expenditure until individuals are no longer willing to accept money as a means of exchange.
Although both examples initially result in increasing expenditures, the second example is far from desirable for any economy. Based on this more realistic conclusion, some level of open-market purchases will likely pressure individuals to refrain from participating in the exchanges. An unlimited amount would therefore completely undermine the value of non-interest-bearing money.
To be clear, I am not suggesting that open-market purchases are inherently bad. My example simply makes clear that open-market purchases may have stimulative effects on short term expenditures, but longer-term costs that far exceed those benefits. As the great Frédéric Bastiat noted many years ago: (emphasis mine)