Macro: Sandcastle economics
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Head of Macroeconomic Research
Summary: As the coronavirus outbreak is hitting the economy, the concept of helicopter money is coming back into vogue again. The latest policy measures proposed by Western policymakers are not strictly speaking the implementation of helicopter money, but it looks a lot like it.
Over the past few days, policymakers have proposed bold economic measures to tackle consequences of the COVID-19:
Even before the start of the crisis, IMF Olivier Blanchard and Macron’s former advisor Jean Pisani-Ferry advocated for the use of helicopter money as a “replacement for the still missing coming fiscal capacity” in the euro area (Nov. 2019).
Strictly speaking, all these measures are not helicopter money, but it looks a lot like it. The basic idea behind this concept is that central banks should give money to the people (that’s why it is also called “QE for people”), in order to increase their purchasing power, rather than helping banks like in the previous crisis. It is quite easy to understand why this concept has a clear political appeal, notably in period of turmoil. In a little bit more than a decade, we have moved from “bank bailout” in 2007-08 to “bailout SMEs and everything else” at any cost in 2020.
The above examples refer more to fiscal support, but it is directly inspired by helicopter money in the sense that governments are literally giving money away to the people, specifically in the case of cash handouts, in order to avoid the system fall down. The underlying idea is to flood the economy with an unlimited amount of cash to prevent the crisis from worsening. These transfers are causing an increase of public debt and are ultimately financed by government bonds that will likely be purchased by central banks. This is the good moment to remember that more than 70% of Germany’s sovereign debt and more than 60% of France’s sovereign debt are held by central banks at the global level.
As the economic impact of the COVID-19 outbreak is likely to be more visible in coming weeks, the concept of helicopter money will certainly generate more and more support among policymakers. Central banks have done their maximum over the past two weeks to make sure liquidity is flowing into the market and that interest rates remain at low levels. The problem is that low interest rates do not automatically induce a significant revival of private investment and consumption. Central banks can push rates as low as possible, if there is not enough demand and that SMEs are strangled by cash flow problems and lack of confidence in the future, the economic machine will not restart. Cash handouts could bring a short-term economic relief and help building businesses’ cash reserves and stimulating demand on the condition that cash is not saved (as it might unfortunately be the case in many European countries). But this massive flow of money into the system, both resulting from fiscal and monetary stimulus, is not without consequences and could spur inflationary pressures in the long run if not controlled.
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