Helicopter money: Central Banks should directly fund government deficits
This material is at http://mailstar.net/coronavirus-finance.html
Newsletter published on March 26, 2020
Friends,
I now have 3 webpages on the Coronavirus:
Coronavirus was developed in a Wuhan lab:
READY in next 24 hours:
Coronavirus Remedies - Chloroquine and Herbal Medicines:
Helicopter money: Central Banks should directly fund government
deficits: http://mailstar.net/coronavirus-finance.html .
I will progressively add to, and improve, these webpages over coming
days and weeks.
Peter
The Coronavirus Finance webpage contains these items:
(1) WaPo publishes Michael Hudson call for Debt Jubilee as Only Way to
Avoid a Depression
(2) Fed helicopter has to go to the people, not Wall St - Ellen Brown
(3) Massive Government Spending without incurring a Debt Burden
(4) Governments must act now to avert a Depression - Martin Wolf in the
Financial Times
(5) Helicopter money: Central Banks should directly fund government
deficits - Martin Sandbu in the Financial Times
(6) Debt Forgiveness for Poor Countries
(7) Debt Forgiveneness needed to save Millions in poor countries
I already sent out items 1, 2, 6 and 7 in earlier newsletters; this one
covers items 3, 4 and 5.
(3) Massive Government Spending without incurring a Debt Burden
Subject: [BULK] Is coronavirus leading to a revolution of the system?
From: "Stan, Positive Money EU" <info@positivemoney.eu>
An incredible amount has happened in the last few weeks and changed all
our lives quite dramatically. Just like most people the Positive Money
Europe team is working from home, however, we have never been busier!
Covid-19 has pushed politicians and central bankers into making
decisions that would've been unthinkable just a few weeks ago:
Governments have put hundreds of billions on the table to support
companies and SMEs. How can they suddenly afford to spend all that money
after years telling of us we should tighten our belts to reduce deficits?
One reason for this is they have the support from central banks. In an
unprecedented move, the ECB has announced a new 750 billions euros of
quantitative easing.
Meanwhile, EU leaders are discussing the possibility of joining forces
by issuing common European debt – a concept known as « Eurobonds » which
used to be a taboo in the EU.
All these measures were unthinkable even a few weeks ago and strongly
contradict past decades of mainstream neoliberal policy making in
Europe. We've been told for years that we must tighten our belts to
reduce the deficit; and now they want to spend like crazy.
Has economic orthodoxy suddenly been turned on its head?
But let's not fool ourselves: most of this money will not end up in the
hands of ordinary people, and, after governments spend this amount of
money, they will find themselves left with a tremendous pile of debt.
Unless we truly shift the economic paradigm once and for all, then the
deadly mentality of austerity is bound to return with a vengeance
afterwards.
To stop this from happening, European governments and institutions
should implement alternative measures so that they can tackle the
economic fallout of Covid-19 whilst avoiding a massive unsustainable
debt burden in the future.
Helicopter Money is the best of these key measures as it would give the
right boost to the eurozone economy in the long term, when the current
health crisis is over. Why? Because it puts money directly where it is
most needed and can be easily spent from: people's pockets. And it does
it without increasing the debt burden!
Not acting now would dramatically worsen the recession we've already
been thrown into and likely result in an economic crisis the likes of
which Europe has not experienced since 2008. That's why Positive Money
Europe will fight tooth and nail in the coming weeks to push the EU into
taking the kind of transformational measures we desperately need.
We will continue releasing articles as the situation develops so please
do keep an eye on our blog and follow us on Facebook and Twitter to stay
up-to-date.
Other great reads:
The virus is an economic emergency too and governments must act now to
avert a depression, warns Martin Wolf, chief economics commentator at
the Financial Times
Coronavirus has shattered the myth that the economy must come first,
writes Adam Tooze in The Guardian
The ECB Must Finance COVID-19 Deficits, writes Paul De Grauwe in Project
Syndicate
Coronavirus: the moment for helicopter money - a great article by Martin
Sandbu in the Financial Times
The ECB's Pandemic Emergency Purchase Programme is a big deal, suggests
Jens van 't Klooster
COVID-19 Is an Opportunity for Europe, argues Lucrezia Reichlin, a
former director of research at the European Central Bank
Helicopter Money "would provide strong stimulus without increasing the
public debt burden", writes Adair Turner
Higher public debt levels will become an economic feature and be
accompanied by private debt cancellation, Mario Draghi, former ECB
President writes in the FT
Italy will be Europe's canary in the coalmine for the post-Covid
economy, opinion from Marchel Alexandrovich, The Guardian
"Though the ECB is rightly aiming at addressing the coronavirus crisis,
there is a risk that fossil fuels free-ride on those measures gain even
cheaper financing to maintain their activities," our Stan Jourdan told
Climate Home News
Quote of the month
"Another option would be for fiscal support to be financed by a
permanent increase in money supply, created by central banks, which
could substitute for debt-financed programmes. This approach should not
raise fears of inflation as long as growth remains below potential, and
central bank independence is respected. And it would reassure markets
about the capacity of governments to support the economy."
Laurence Boone, Chief Economist at the OECD
Stay healthy and safe, and we will keep you informed!
Stan Jourdan
Executive Director, Positive Money Europe
(4) Governments must act now to avert a Depression - Martin Wolf in the
Financial Times
The virus is an economic emergency too
As borrowers and spenders of last resort, governments must act now to
avert a depression
Martin Wolf
March 17, 2020
The pandemic was not unexpected. But reality always differs from
expectations. This is not just a threat to health. It may also be a
bigger economic threat than the financial crisis of 2008-09. Dealing
with it will require strong and intelligent leadership. Central banks
have made a good start. The onus now falls on governments. No event
better demonstrates why a quality administrative state, led by people
able to differentiate experts from charlatans, is so vital to the public.
A central question is how deep and long the health emergency will be.
One hope is that locking down countries (as in Spain) or parts of
countries (as in China) will eliminate the virus. Yet, even if this
proved to be true in some places, it will clearly not be true
everywhere. An opposite extreme is that up to 80 per cent of the world’s
population could be infected. At a possible mortality rate of 1 per
cent, that could mean 60m additional deaths, equivalent to the second
world war. This calamity would probably also take time: the Spanish flu
of 1918 came in three waves, over a year. Yet it is more likely that
this ends up in the middle: the death rate will be lower, but the
disease will also not disappear.
If so, the world might not return to pre-crisis behaviour until well
into 2021. Younger people might behave normally, sooner. But older ones
will not. Moreover, even if a few countries do eliminate the disease,
quarantines will be maintained against others. In sum, the impact of the
coronavirus is likely to be severe and prolonged. At the very least,
policymakers must plan on that.
The pandemic has already squeezed both supply and demand. Lockdowns halt
essential supplies and a wide range of purchases, especially
entertainment and travel. The result will be a sharp fall in activity in
the first half of this year.
Above all, a depression threatens. Many households and businesses are
likely to run out of money soon. Even in wealthy countries, a large
proportion of the population has next to no cash reserves. The private
sector — above all the non-financial corporate sector — has also gorged
itself on indebtedness.
So consumer demand will weaken even more. Businesses will go bankrupt.
People will refuse to sell to businesses deemed likely to go bankrupt,
unless they can offer payment in advance. Doubt about the health of the
financial system will re-emerge. There is a risk of a collapse in demand
and economic activity that goes far beyond the direct impact of the
health emergency.
It will also be particularly hard to contain the spread of disease in
countries with limited social insurance and weak social control. This
will affect the US above all: many sick people will refuse to go to
hospital and will also be forced to work. Social insurance is efficient.
As lenders of last resort, the central banks must ensure liquidity by
keeping the cost of borrowing low and financing credit supply, both
directly and indirectly. But central banks cannot deliver solvency. They
cannot underpin household incomes or insure businesses against this
collapse in demand. As borrowers and spenders of last resort,
governments can and must do so.
Long-term government debt is so cheap that they need feel no fear of
doing so, either: Germany, Japan, France and the UK are now able to
borrow for 30 years at a nominal rate of less than 1 per cent, Canada at
1.3 per cent and the US at 1.4 per cent.
This, then, is a time-limited crisis, with economic and health
consequences that governments must manage. Domestically, the bare
minimum is generous sick pay and unemployment insurance, including to
freelance workers, for the period of the crisis. If this is too
difficult, governments can just send everybody a cheque.
Yet even this will not be enough if the costs of mass bankruptcy and a
depression are to be avoided. Emmanuel Saez and Gabriel Zucman of
Berkeley argue that: "The most direct way to provide ... insurance is to
have the government act as a buyer of last resort. If the government
fully replaces the demand that evaporates, each business can keep paying
its workers and maintain its capital stock, as if it was operating ...
as usual. Anatole Kaletsky of Gavekal has recommended a similar response.
Providing such relief will not create moral hazard. Being helped through
a once-in-a-century pandemic will hardly encourage egregious
irresponsibility. If businesses have borrowed too much, they will still
go bankrupt, in the end.
This plan is far better than loans and loan guarantees, as proposed by
the German government. Businesses will take up loans only to ensure
their survival through the crisis, not necessarily to pay their workers.
Moreover, loans will have to be repaid, creating a burden when the
pandemic ends. In this proposed programme, however, payments can be made
conditional on keeping workers. The programme will also end naturally,
with the pandemic itself. Governments can then impose additional taxes
to recoup their outlays.
Maintaining incomes and minimising the long-term costs of collapsing
businesses are essential. In addition, within the eurozone it will be
essential to help governments whose ability to borrow is limited.
Globally, vulnerable emerging countries will also need help managing the
health and economic crises. It will be vital, too, to roll back the
zero-sum nationalism of today's policies, which will make it difficult
to rebuild a co-operative and healthy global order.
This too shall pass. But it will not do so tomorrow. The pandemic risks
creating a depression. Salus rei publicae suprema lex (the safety of the
republic is the supreme law). In war, governments spend freely. Now,
too, they must mobilise their resources to prevent a disaster. Think
big. Act now. Together.
Follow Martin Wolf with myFT and on Twitter
(5) Helicopter money: Central Banks should directly fund government
deficits - Martin Sandbu in the Financial Times
Coronavirus: the moment for helicopter money
Economic taboos are being broken to finance the huge government deficits
needed to fight the crisis
Martin Sandbu in London
March 20, 2020
The Covid-19 pandemic that is ravaging lives and livelihoods around the
world has also claimed a more subtle victim: conventional taboos in
economic policy thinking are swiftly being swept away.
Economic proposals that a week ago looked radical now appear timid.
Fiscal packages bigger than anything seen in years are considered too
small only a few days after they were announced.
Robert Chote, the head of the watchdog charged with monitoring UK fiscal
discipline, said this week the government should not worry about
short-term deficits because it was facing something like a "wartime
situation".
"This is not a time to be squeamish about one-off additions to the
public debt," he told MPs.
There has been a "recognition that this shock is absolutely different"
from previous crises, says Beatrice Weder di Mauro, an economics
professor and president of the Centre for Economic Policy Research.
"Things are moving very fast, and minds are too."
The result is that a series of policy ideas which were once the province
of a small number of mavericks and limited to purely theoretical
discussions are taking centre stage.
The most important of those unorthodox approaches is the "helicopter
drop" — printing money and handing it out to everyone, with no strings
attached.
Ms Weder di Mauro has co-edited two ebooks on the economics of the virus
crisis in as many weeks. She observes that the mainstream of economics
has moved very fast towards the view that the best policy would assure
that "nobody should lose their job or their income because of the virus".
Even supporters of this once unthinkable approach acknowledge it will be
expensive. "We have to be willing to accept fiscal deficits on the scale
of 2009," says Adair Turner, the former head of the UK's Financial
Services Authority.
Given the need for large fiscal deficits, the debate about helicopter
money really involves two separate policy questions, he says. The first
is how to finance the stimulus — should the central bank pay for it
through direct monetary financing, effectively printing money, or should
governments borrow in the usual way? The second is how the money is then
distributed, whether through cash handouts or other government spending.
As it is, economists and policymakers are warming to radical answers to
both questions.
Central banks have not yet explicitly offered to monetise deficits, but
they have opened the taps on big new asset purchase programmes to buy
the glut of bonds governments will soon issue. In the eurozone, there
are live discussions about issuing a joint "corona bond" or ramping up
credit lines from the European Stability Mechanism, the monetary union's
rescue fund for sovereigns, in the expectation that the European Central
Bank would keep the cost of such borrowing low.
Some economists now call openly for explicit helicopter money in the
sense that central banks should directly fund government deficits. "I do
think the time is right for monetary finance," says Lord Turner. "There
would be a clarity of assuring people that there is no limit on the
money available."
Monetary finance was popularised as a theoretical possibility by Ben
Bernanke, former US Federal Reserve chair. Since leaving the Fed, Mr
Bernanke has publicly argued that "under certain extreme circumstances"
monetary financing of fiscal deficit spending "may be the best available
alternative".
This had long been an unacceptable view among economists, who were
scarred by the stagflationary 1970s and worried about the dangers of
hyperinflation that had ravaged countries in interwar Europe and more
recently in the developing world. This changed with the global financial
crisis, when central banks engaged in massive money creation without
inflationary effects. Warnings about hyperinflation lost their bite.
As for direct cash handouts, they are already happening. In February,
the government of Hong Kong decided to transfer HK$10,000 ($1,270) to
all residents financially affected by the virus outbreak. Singapore's
latest budget, too, provides for small cash payments to all adult
Singaporeans.
In the US, support is building for sending cheques directly to all
Americans. Former economic advisers to presidents Barack Obama and
George W Bush support the idea. President Donald Trump and his Treasury
secretary Steven Mnuchin have proposed it, and senators have included it
in the stimulus bill currently going through Congress.
One reason why these unconventional ideas are gaining traction is
because the financial crisis, growing inequality and the fear of
technological automation causing unemployment had already triggered
growing interest in new policy approaches. "There is a bit of ‘I always
wanted this'," says Ms Weder di Mauro.
Betsey Stevenson, an economics professor at the University of Michigan
and a former economic adviser at the Obama White House, points to the
broad coalition of people all supporting cash handouts: "People on the
left ... saying this is great, people on the right ... wanting to help
the middle class; those who like the administrative simplicity of it;
and then people who realise time is of the essence."
A second factor behind the interest in these ideas is that they are not
entirely without precedent. The financial crisis and its aftermath
forced central banks to take actions that brought them closer to
monetary financing.
Helicopter money is already here in the sense that "a central bank gives
transfers to the private sector", says Eric Lonergan, a macro fund
manager. He adds that the ECB now offers loans to banks at a lower
interest rate, under certain conditions, than banks receive on reserves
held on deposit with the ECB. That margin is an outright money-financed
fiscal transfer. Mr Lonergan argues this can be expanded and tied to
conditions that in effect would transfer the subsidy to individuals.
Lord Turner says that there is no hard distinction between outright
monetary financing and central banks' existing practice of buying
government bonds. "Every year the Bank of Japan buys Japanese government
debt equal to the government deficit. So the volume of bonds owned by
the private sector does not rise. That is permanent monetary finance,"
he argues.
Governments have also sent no-strings-attached cheques to all citizens
before. "[President George W] Bush did direct cash handouts," says Ms
Stevenson. The difference is that in the 2001 and 2008 recessions the
intention was to stimulate demand, today it is to "put money in the
hands of people who will lose their jobs" and prevent a "cascading
economic downturn".
Aside from precedent, the most important reason for the interest in
helicopter drops — both as monetary finance and as direct cash payments
— is the scale of the economic challenge.
If anybody had told you at Christmas that this year would be one [with]
an enormous symmetric shock hitting all the advanced countries and that
this would cost something like 50 per cent of GDP for a few months or
maybe longer ... the kind of thing that happens in a war, everybody
would have said you are crazy," says Ms Weder di Mauro. "There was no
imagination to see where something like this could come from."
Governments now find themselves needing to spend much more, and to do so
much faster, than they are accustomed to. "The attitude should be we're
at war with this pandemic, we're going to win this war," and
double-digit deficits are a price worth paying, says Ms Stevenson. "If
we win the war, we can recoup that money."
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