Monday 06/04/2020

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Peter Praet talking about helicopters...

Chief Economist

Helicopter Money is an extreme form of quantitative easing. It was first suggested in the sixties by the American economist Milton Friedman as a plan to stimulate economic growth and combat deflation. The money thus created is given directly to the population. In an extreme form it is not unlike scattering money over the heads of the people. The idea of using helicopter money won ever more ground in recent months. Hans Bevers and Bruno Colmant discuss the pros and cons.

Earlier this month, a few days after the ECB had once more announced additional stimulus, chief economist Peter Praet suggested to Italian media that interest rates could go even lower and that helicopter money is a theoretical possibility for any central bank. This is correct, and what’s more: in the present context, more helicopter money should be a real line of thought..

Mind you: this is not just a plea for helicopter money. The most obvious solution to fight the current weak nominal growth lies in a more expansive fiscal policy, preferably in the form of public investments. This is because the monetary policy loses a lot of its effectiveness when interest rates lean towards zero -  as is now almost seven years the case. In cases like these basic economic theory dictates that fiscal expansion would be much more effective. Meanwhile, it is encouraging that first the IMF and now the OECD and the G20 see this almost as a prerequisite for a sustainable recovery of the world economy.

But against the background of very low growth, inflation, zero interest rates, high public and private debt, slower population growth, an aging population and inequality there is indeed a fair chance that the current instruments of central bankers will not suffice. Firmer policies in the form of helicopter money will sooner or later be required. Also because it will not always be obvious to quickly launch infrastructure projects due to practical concerns or lack of time. In those circumstances, helicopter money can certainly provide relief and is preferable to measures as monetary easing.

This can obviously take place in different forms, like tax reductions for member states but funded by the ECB, handing out vouchers or simply by central banks shredding the government bonds they now hold. So there are many possibilities to come up with a response for  present situations of chronic shortages in demands. The only condition is that monetary and fiscal policy makers speak the same language.

In its most  extreme form, helicopter money is basically handing out money. This assumes some basic questions about the need to apply this to everyone. The higher the income, the more money will be put into savings. This therefore calls for helicopter money that should be immediately spent, as with gift vouchers with an end date. But even then this causes another problem. For lower incomes, this will be an incentive for increased consumption, while for higher incomes it will take the place of future consumption. The nature of the goods and services consumed should also be analyzed. Do imported goods have the same value as locally produced products? The answer to these questions will be different for different member states.

It's only a matter of time before Japanese policymakers will walk the path of helicopter money (albeit carefully). After 2008, Japan's budget deficit average was 8%, the public gross debt evolved to 245% of the GDP, and since 2012 the central bank boosts its balance sheet at an unprecedented rate. Nevertheless, the Bank of Japan remains desperate for higher inflation and growth remains poor. After eight years of economic stagnation, ultra-low inflation and growing demographic issues, many observers fear that the Eurozone is “going Japanese”.

But let’s not forget that  monetary financing or helicopter money always will be implemented much more easily in a closed and homogeneous society like Japan. Judging by the lack of political consensus on the current policy of the ECB and the unwillingness to further completion of the monetary union, it is very likely that in a highly fragmented eurozone this will prove to be an impossible slope. Peter Praet is probably one of the best placed persons to realize that the ultimate practical implementation will be extremely difficult within the eurozone. The fact that he did it anyway, but should not only be welcomed: it also means that he is fully aware of the seriousness of the situation in the currency union. If only everybody could be convinced of the same...

Hans Bevers
Chief Economist Bank Degroof Petercam

Bruno Colmant
Head of Macro Research Bank Degroof Petercam