The coronavirus pandemic is causing a huge contraction and high unemployment in most economies worldwide. According to the St Louis FED projections, the economic American freeze could send the unemployment rate past 32%.
This may encourage policymakers to try new strategies, including unconventional monetary finance like helicopter money, that is, the creation of money by central banks and its distribution for free to taxpayers or companies in order to solve unemployment and economic problems.
That’s not just a conjecture. According to the Financial Times, Trump and his Secretary of Treasury, Stephen Mnuchin, are considering it. The President’s persistent criticism of FED over the last few years fits with the assumption of radical monetary policies.
But the issue of helicopter money is sensitive.
For manyeconomists it’s madness, or at least a last-resort monetary policy.
It calls to mind the unfortunate outcomes associated with printing money policies and hyperinflation: Argentina and Zimbabwe recently, or Germany in the 1920s
But according to some studies and a few economists, we should not rule it out; helicopter money could be a way of reviving the economy in a context of extreme crisis.
Its main goal would be to pay unemployed and laid-off people, without creating private or public debt; and to finance and revive some economic sectors and companies… in order to allow some normalcy.
The risks associated with helicopter money are real, but the pandemic we are currently living may justify it.
On the other hand, we are facing strong anti-inflationary forces in our economies, which may help its performance; and helicopter money is not necessarily the classic printing money, associated with uncontrolled public spending. It can be designed in several ways and tried tentatively, in order to keep inflation controlled.
It’s not a universal tool, but in some countries and especially in Europe it could be a good tool.
Why Europe? Because of the role of the Euro, and the different situations in European countries, in terms of historical public debt and financial impact of the pandemic.
The Europeans could use Helicopter Euros to monetize the debts that are being created by the coronavirus – and also to monetize the rather unsustainable historical debt of southern countries. That could solve some of the deepest European problems.
The value of the Euro would fall (not necessarily a bad thing) and there would be a probable resurgence of inflation (also not necessarily a bad thing, if contained and kept under control). Some Northern countries could lose in the immediate, but the EU as a whole would gain a lot.
Anyway, that’s a highly improbable scenario. Fears and the German-aligned interests and views will not let it go ahead.
In short: there are many factors that should be considered, the most important of which may be the amount of money involved. The inflation outcome and its rates depend largely on the amount of money being created by the Central Banks.
Here are some posts about the issue:
What do economists thing about Helicopter Money?
How much Helicopter Money can be created?
Helicopter Money is different from Quantitative Easing
Monetary policies and helicopter money: China, USA and Europe
Helicopter money, Adair Turner and the end of the European project