Monetary policies, helicopter money: China, USA and Europe

The Chinese authorities are often accused of being irresponsible or opportunist regarding their monetary policies. According to an article written in the Financial Times by Arthur Budaghyan, from BCA Research, China has chosen the path of unrelenting monetary stimulus.

“Over the past 10 years, Chinese banks have been on a credit and money creation binge. They have created Rmb144tn ($21tn) of new money since 2009, more than twice the amount of the money supply created in the US, the eurozone and Japan combined over the same period.

In total, China’s money supply stands at Rmb192tn, equivalent to $28tn. It equals the size of broad money supply in the US and the eurozone put together, yet China’s nominal GDP is only two-thirds that of the US.”

One of the consequences of this monetary policy is the devaluation of the Chinese currency, the renminbi, by 12% since 2018 – a cause of economic pain across Asian and other emerging markets, according to the same author. The devaluation makes Chinese products cheaper, creating difficulties in competing countries.

Arthur Budaghyan goes to the lengths of calling the Chinese monetary policies helicopter money – a suggestion that the Chinese are printing money through virtually free loans and subsidies.

And he also stresses the dangers associated with it: a rapid escalation of asset prices followed by a contraction, and several domino effects all over the world economy.

The risks exist, and the criticism of Chinese monetary policies is pertinent, at least in part. But the Chinese policy raises pertinent questions about helicopter money. Namely, it seems to show that there is room for it without big inflationary pressures; or, if you prefer, as some economists are suggesting, money supply and inflation are now largely decoupled (or is it a peculiarity of the Chinese system and its huge markets?).

This raises another question: are the Chinese going to retract, and stop using aggressive monetary policies in the present crisis? Or are they going to double-down on their monetary policies?

And the same question can be extended to Japan, the US, or the UE.

The Bank of Japan was the first central bank to push interest rates to zero, and also the first to pioneer quantitative easing in 2001, making it almost permanent in order to expand the monetary base, credit, and investment – something that some economists compare to helicopter money.

Most probably Japanese will certainly continue to bet on aggressive monetary policies. That’s important to stimulate the economy while the coronavirus crisis is hitting hard.

And the same is expected from the US and its central bank, the FED.

In the last two decades, the US has championed the use of Quantitative Easing (QE) and low credit rates. Ben Bernanke, the chairman of the Federal Reserve at the time of the 2008 crisis, has added almost $2 trillion to the American money supply – the largest monetary expansion in US history. At the same time, the debt on the FED’s balance sheet doubled between November 2008 and October 2014, reaching $4.4 trillion.

Without all this – and huge cuts in the interest rates – the crisis of 2008-9 would not have been solved so quickly.

With the coronavirus crisis the US has already begun to use aggressive monetary tools. And it’s mostly certain that it will continue to do so, in the next months or years.

But what about the European Union? 

During the 2008 crisis the European Central Bank has only adopted QE in January 2015, after seven years of austerity measures. And they took four more years to reach the American QE amounts.

The Germans are traditional opponents of monetary “audacities”. Their economy has worked perfectly without such tools, since the creation of the Euro. They have expanded their exports and production steadily over the last decades.

And they are now leading the group opposing large-scale monetary measures, designed to combat the coronavirus crisis in Europe.

As referred by Spiegel International, many economists are supporting euro bonds as the best way to share the burden of the current crisis. “”The strong must help the weak,” seven well-known German economists wrote in an op-ed in a leading German newspaper. They proposed as a one-off measure issuing a trillion euros worth of communitized bonds. Member states could then help themselves to the pool of money “should they lose access to capital markets.””

But policymakers in German and other Northern European countries are opposing it.

This lack of solidarity, the Brexit and the ascent of populist movements aligned with nationalist agendas are bad omens for the Union.

The coronavirus pandemic can be the end of the European project. See in this regard: Coronavirus, helicopter money, Adair Turner and the end of the Euro

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