Predictions are that we will soon be seeing the "nuclear option" -- central bank-created money injected
directly into the real economy. All other options having failed, governments will
be reduced to issuing money outright to cover budget deficits. So warns a
September 18 article on ZeroHedge titled "It Begins:
Australia's Largest Investment Bank Just Said 'Helicopter Money' Is 12-18
liquidity by andersoneric87
Money reformers will say it's about time. Virtually all money today is created as bank debt, but people can no longer take on more debt. The money supply has shrunk along with people's ability to borrow new money into existence. Quantitative easing (QE) attempts to re-inflate the money supply by giving money to banks to create more debt, but that policy has failed. It's time to try dropping some debt-free money on Main Street.
The Zerohedge prediction is based on a release from Macqurie, Australia's largest investment bank. It notes that GDP is contracting, deflationary pressures are accelerating, public and private sectors are not driving the velocity of money higher, and central bank injections of liquidity are losing their effectiveness. Current policies are not working. As a result:
There are several policies that could be and probably would be considered over the next 12-18 months. If private sector lacks confidence and visibility to raise velocity of money, then (arguably) public sector could. In other words, instead of acting via bond markets and banking sector, why shouldn't public sector bypass markets altogether and inject stimulus directly into the 'blood stream'? Whilst it might or might not be called QE, it would have a much stronger impact and unlike the last seven years, the recovery could actually mimic a conventional business cycle and investors would soon start discussing multiplier effects and positioning in areas of greatest investment.
Willem Buiter, chief global economist at Citigroup, is also recommending "helicopter money drops" to avoid an imminent global recession, stating:
A global recession starting in 2016 led by China is now our Global Economics team's main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing. . . .
Helicopter money drops in China, the euro area, the UK, and the U.S. and debt restructuring . . . can mitigate and, if implemented immediately, prevent a recession during the next two years without raising the risk of a deeper and longer recession later.- Advertisement -
In the UK, something akin to a helicopter money drop was just put on the table by Jeremy Corbyn, the newly-elected Labor leader. He proposes to give the Bank of England a new mandate to upgrade the economy to invest in new large scale housing, energy, transport and digital projects. He calls it "quantitative easing for people instead of banks" (PQE). The investments would be made through a National Investment Bank set up to invest in new infrastructure and in the hi-tech innovative industries of the future.
Australian blogger Prof. Bill Mitchell agrees that PQE is economically sound. But he says it should not be called "quantitative easing." QE is just an asset swap -- cash for federal securities or mortgage-backed securities on bank balance sheets. What Corbyn is proposing is actually Overt Money Financing (OMF) -- injecting money directly into the economy.
Mitchell acknowledges that OMF is a taboo concept in mainstream economics. Allegedly, this is because it would lead to hyperinflation. But the real reasons, he says, are that:
1. It cuts out the private sector bond traders from their dose of corporate welfare which unlike other forms of welfare like sickness and unemployment benefits etc. has made the recipients rich in the extreme. . . .
2. It takes away the 'debt monkey' that is used to clobber governments that seek to run larger fiscal deficits.
OMF as a Solution to the EU Crisis
Mitchell observes that OMF has actually been put on the table by the European Parliament. According to a Draft Report by the Committee on Economic and Monetary Affairs on the European Central Bank Annual report for 2012, the European Parliament:
9. Considers that the monetary policy tools that the ECB has used since the beginning of the crisis . . . have revealed their limits as regards stimulating growth and improving the situation on the labour market; considers, therefore, that the ECB could investigate the possibilities of implementing new unconventional measures . . . including the use of the Emergency Liquidity Assistance facility to undertake an 'overt money financing' of government debt . . . .