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Mar 9th 2016, 16:02 by Buttonwood
INTEREST rates are negative in much of Europe and Japan, and it may be a while
before the Federal Reserve follows up December's quarter-point increase in
rates. So that doesn't leave the authorities with a lot of room, in terms of
altering the level of rates, to ease policy if another downturn hits.
One option would be "helicopter money" - the central bank could create the
money to fund a fiscal stimulus, either by direct transfers to consumers* or by
funding public projects such as infrastructure. The idea would be to stimulate
demand and potentially increase inflation, which is below target in many
countries. Martin Wolf of the FT recently praised the idea, and he hobnobs with
the world's policymakers on a regular basis. The hedge fund manager Ray Dalio
is another who thinks that helicopter money is the next option.
Why might this be helpful? The economist Simon Wren-Lewis has said there is
an understandable view that it would be better to print money and give it to
consumers who would spend it (helicopter money), rather than using it to buy
government debt (QE) which may reduce long term interest rates which may help
stimulate the economy. The second route has been tried and has not been that
successful, so why not try the first route?
It is hard to see any central bank doing this without very explicit approval
from their government, and that creates the very practical problem that neither
the German government nor the Republicans in the US Congress would ever agree
to such a thing. Helicopter money has more appeal to leftwing politicians since
it can be classed as a redistributive policy. Either all citizens would get the
same payout or, if the money is spent on infrastructure, unemployment would
fall. A version of the policy has been proposed by Britain's Labour party.
So how would the markets react? Steven Englander of Citigroup tries to look
through the implications in a research note. He works on the assumption of a US
helicopter drop (although Europe or Japan look more likely candidates). The
yield curve would steepen (long-dated bond yields would rise), and equities
would do well (particularly cyclical stocks on the grounds that the effect
would be to stimulate the economy. Surprisingly, perhaps, he thinks the effect
would be positive for the dollar; stronger growth and higher bond yields would
suck in foreign capital.
A lot would surely depend on the size of the stimulus and how it would be
framed. A modest stimulus might lift inflation and demand a bit, without
leading to talk of Weimar-style hyperinflation. Would the expansion be
permanent or would the government pre-announce a plan to "claw it back" in a
few years' time? That might reassure the markets but some consumers might save
the money to meet the tax bill, making the stimulus less effective. There is
also a risk that a lot of money might be spent on imports - flat screen TVs and
foreign holidays. That might cause the current account deficit to soar,
potentially negative for the currency. The effect might be to stimulate
overseas economies, allowing them to free ride on the helicopter. So one answer
would be to get lots of countries to pursue helicopter money simultaneously,
rather as they agreed to use fiscal stimulus after Lehman collapsed.
There are, of course, lots of potential snags. What would happen to those
investors who bought bonds at ultra-low yields if bond prices plunged? No
problem for pension funds (whose liabilities would fall too) but it might be a
problem for banks. And it is possible that investors might take fright; that
monetisation of government spending might be a broken taboo too far. After all,
what government would ever want to raise taxes or cut spending, if lots of
voter-friendly boondoggles could be financed by a tame central bank?
suggests
direct deposits into household accounts offered at the central bank. It s
simple and doesn t require any political debate about how best to spend the
newly created money.
But around 10m US households and 1.5m British adults lack a bank account, many
of whom will be poor. Is it fair to exclude them? By the same token, these
people may not be on the electoral roll. And would you deliberately exclude
people? Prisoners? Immigrants? One can only imagine the political furore that
could be created, or the headlines if some people spend the proceeds on cocaine
or a drinking binge. Building lots of schools and hospitals might be the safer
option.