Helicopter money and quantitative easing policy as a method of saving the economy
One of the tasks of the Central Bank is to maintain the stability of the national currency. Or, more simply, keeping its value in relation to other currencies in a certain corridor. The Central Bank has a lot of tools to maintain a stable inflation rate, the essence is the same – there should be inflation. The target inflation rate is different for each country. For example, for the USA, Europe and Japan this parameter is about 2% per year.
Inflation keeps production in good shape, while deflation means a decline in production, consumption and, as a consequence, a drop in the level of GDP. Both high inflation and deflation are detrimental to the economy and the national currency. By the way, the strengthening of the national currency hits the exporters, who ensure the balance of payments. While Russia and other countries are fighting inflation, Japan and Europe have another problem – deflation. Until recently, the EU Central Bank practiced a policy of qualitative easing, injecting currency into the economies of countries and setting negative rates (money should work in circulation, and not lie dead on accounts). But that all changed with the arrival of COVID-19. And heavy artillery – “Helicopter money” was used.
Helicopter money – saving the world economy or triggering the global crisis
On March 27, the US Senate approved the largest package of anti-crisis measures in the history of the country to support the economy in distress from the COVID-19 pandemic. In total, the country’s economy will receive about $ 2.2 trillion. The United States in the form of increased spending on certain industries, direct support to the population, concessional lending and social assistance. The majority of the adult population will receive a one-time aid of $ 1,200. USA and 500 dollars. USA per child.
For the first time the idea of ”Helicopter money” was proposed in 1969 by the Nobel laureate Milton Friedman. In general terms, his idea was reduced to “throwing money out of a helicopter.” In his opinion, having received additional money, the population would use it to purchase goods, thereby stimulating production and increasing the money supply in the country. The idea remained a theory for two reasons:
- The Central Bank considered it risky, since such actions could trigger uncontrolled inflation. On the other hand, there was no guarantee that the population would not send this money to accumulation funds. The problem of deflation is inherent in developed countries, where the population “has everything they need.”
- The Central Bank possessed a different set of instruments for adjusting inflation, which made it possible not to resort to such radical methods.
It is worth noting here that in the CIS countries they would simply turn on the printing press, without much thought. But in the EU, US and Asia, the approach is different.
In 2006, Fed Chairman Ben Bernanke allowed the use of “helicopter money” as a tool to fight deflation. In 2016, the idea was returned to the United States again, arguing that classical methods of quantitative easing no longer work.
- reference… The quantitative easing policy provides for the Central Bank to stimulate the economy during a recession by injecting money through long-term financial assets. In other words, under the classical monetary policy, the Central Bank buys out short-term government bonds, with quantitative easing – long-term government bonds, thereby financing commercial banks. This method is used when the interest rate has been reduced to a critical level and does not allow the money supply to grow.
With quantitative easing, money is introduced into the economy through banks and can be withdrawn from it by selling financial obligations purchased by the Central Bank. “Helicopter money” is also money injections into the economy, but the money here goes directly to end consumers and cannot be “pulled” out of circulation in a direct form.
The quantitative easing policy was originally developed for the United States. And injections in several stages of more than 3 trillion dollars. The United States helped the country through the 2008 crisis. On March 15, 2020, the Fed resumed its policy by purchasing bonds worth $ 700 billion. USA. At the same time, the Fed cut the discount rate to near-zero level. But in the light of the general global panic, which is already being compared with 1987, this did not have any effect.
Big stakes are being made on “Helicopter Money”. There are no examples in history of such large-scale cash injections on a non-refundable basis. Attempts to simply distribute money have been made in some Scandinavian countries, but on a smaller scale. In 2016, in a referendum in Switzerland, citizens voluntarily abandoned such a model.
The idea of ”Helicopter Money” in the face of rising unemployment and a total decline in production in a number of sectors seems quite working. But there are several questions for her:
- Implementation problem. There is no understanding of how efficiently they will be distributed. And will it not turn out that the population frightened by the crisis will prefer to keep them in reserve. And if, nevertheless, consumption continues to grow, will it not lead to inflationary pressures.
- The very fact of launching such a “last resort” method suggests that the US economy is in a deplorable state. Whether this will serve as a signal to other countries and how they will perceive it is a question.
- The problem of eliminating the cause. Filling the economy with paper does not mean solving its structural problems.
According to opponents of the theory, the uncontrolled distribution of money demonstrates the failure of monetary policy. Loss of control over emissions can lead to chaos of the entire world system. In any case, the world is on the verge of something new. And the fact that the world’s leading economy is launching unprecedented techniques says a lot. But who is right, time will tell.