2016-03-10 08:09:44
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?
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.