Last week I wrote about how these measures of monetary and fiscal expansion would perhaps be nothing more than survival actions with little added value and economic stimulus. On the demand side, people now have a less active life and with the uncertainty about the future they end up consuming less; while on the supply side, regardless of how low interest rates really are, companies with solvency problems or lack of liquidity would probably always go into debt in order to pay salaries.
There is, however, a better way to possibly mitigate the negative effects of these measures. Helicopter Money refers to the injection of capital into the economy directly into the pockets of economic agents. This would increase disposable income, and consequently, lead to higher demand and lower corporate borrowing requirements. Ben Bernanke called it a cash-funded fiscal program (2016). The reason behind this, is because Helicopter Money can be thought of as a fiscal expansion. The central bank would buy government bonds in open market operations and the state would cut taxes by the same amount.
Olivier Blanchard (2019), former chief economist of the IMF, mentions two possible ways for this to happen:
- Indirect : Treasury bonds would be issued by a state and would later be purchased by the central bank. The debt is from the government to the central bank. The central bank sees an increase in its liabilities (amount of money) as well as in its assets (treasury bonds) with its net equal;
- Direct: Central Bank transfers money directly to families. There is no debt from the government to the central bank. There is an increase in liabilities (amount of money) without an increase in assets, and the net position decreases.
However, there are disadvantages in each scenario. In the first, the decrease in the central bank's net capital position is not in the interest of central banks. It makes them look badly managed and jeopardizes their independence. In the indirect method, the government has the incentive to increase taxes since there is an increase in its debt. That way, consumers may be more willing to spend that money directly.
Then there are also barriers to its implementation. Helicopter Money turns out to be a way of circumventing fiscal consolidation rules and certainly some European countries would not be very open for this to happen. In addition, more practical questions would also need to be answered: Who would provide households with information to central banks? Who receives that amount, each individual or the household? Would you need parliamentary approval? Does the ECB have the capacity to do so? Would all countries receive the same amount?
In Europe, political decisions already take their time to be taken, and a policy of this magnitude would be highly complicated to implement. However, it would certainly help to mitigate the negative effects of this pandemic in a more efficient way than any other measure. Also a few months ago, I was writing about the possibility of observing Helicopter Money in the Eurozone, saying that only in the face of a major crisis would it be possible to see this measure in action. Unfortunately, that situation has arrived and it will be interesting to see if the conservative European politicians will be able to set a precedent never seen before.
Analysis and opinions provided included are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade. Indiscriminate reliance on illustrative or informational materials may lead to losses.
Risk Warning: Trading Forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Prior to trading, you should take into consideration your level of experience and financial situation. TeleTrade strives to provide you with all the necessary information and protective measures, but, if the risks seem still unclear to you, please seek independent advice.
© 2011-2020 TeleTrade-DJ International Consulting Ltd
TeleTrade-DJ International Consulting Ltd is registered as a Cyprus Investment Firm (CIF) under registration number HE272810 and is licensed by the Cyprus Securities and Exchange Commission (CySEC) under license number 158/11.
The company operates in accordance with Markets in Financial Instruments Directive (MiFID).
The content on this website is for information purposes only. All the services and information provided have been obtained from sources deemed to be reliable. TeleTrade-DJ International Consulting Ltd ("TeleTrade") and/or any third-party information providers provide the services and information without warranty of any kind. By using this information and services you agree that under no circumstances shall TeleTrade have any liability to any person or entity for any loss or damage in whole or part caused by reliance on such information and services.
TeleTrade cooperates exclusively with regulated financial institutions for the safekeeping of clients' funds. Please see the entire list of banks and payment service providers entrusted with the handling of clients' funds.
TeleTrade-DJ International Consulting Ltd currently provides its services on a cross-border basis, within EEA states (except Belgium) under the MiFID passporting regime, and in selected 3rd countries. TeleTrade does not provide its services to residents or nationals of the USA.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.