Lockdown and helicopter money - Forecast for the (near) future

After a strong but partial rebound in Q60 right after the lockdown was lifted, there is no doubt that Europe and possibly the US are facing a large decline in QXNUMX due to the re-spread of the virus and further restrictions. On this point, Europe is weeks ahead of the United States, and France is arguably the next EU country to announce a national lockdown tonight. Germany is expected to take a similar step in the coming days by reintroducing a two-week "wave lockdown" that would mean shutting down everything except schools, kindergartens and basic necessities. The economic losses are sure to be enormous. Based on previous work by the French National Institute of Statistics and Economic Research (INSEE), losses from a one-month interruption to economic activity in France can be as high as XNUMX billion euros, not counting the inevitable wave of bankruptcies that will occur in the sectors most affected by constraints, especially in the hospitality and gastronomy.

About the Author

Christopher Dembik - French economist of Polish origin. Is a global head of macroeconomic research at a Danish investment bank Saxo Bank (a subsidiary of the Chinese company Geely serving 860 HNW customers around the world). He is also an advisor to French parliamentarians and a member of the Polish think tank CASE, which took first place in the economic think tank in Central and Eastern Europe according to a report Global Go to Think Tank Index. As a global head of macroeconomic research, he supports branches, providing analysis of global monetary policy and macroeconomic developments to institutional and HNW clients in Europe and MENA. He is a regular commentator in international media (CNBC, Reuters, FT, BFM TV, France 2, etc.) and a speaker at international events (COP22, MENA Investment Congress, Paris Global Conference, etc.).

Further accommodation measures are on the horizon

Given the rapidly worsening economic situation, all eyes are once again turning to central banks, especially EBCwho is meeting tomorrow. Although we do not expect any changes in monetary policy at this meeting, the risk of a W-shaped economic recovery together with the continued decline in inflation will force Christine Lagarde to double the dovish monetary stance of the ECB and open the door to further stimulus at its December meeting. Failure to send dovish signals to the market tomorrow would be as damaging a political mistake as the interest rate hike in July 2008. The fact that many European governments are considering extending all major relief programs beyond the end of the year is a relief to the ECB, which sees their potential termination as the main risk to growth in early 2021. However, further action in the field of monetary policy is inevitable. If the economy continues to weaken and ECB officials have to provide further tools, the most likely solution is to increase the pace and total pool of funds for asset purchases, but we believe this is not particularly effective.

Next step: helicopter money

What was once unimaginable is becoming more and more likely: we believe that the only effective way for central banks to deal with permanent scars from a pandemic is to implement some form of helicopter money in combination with a fiat digital currency to directly transfer funds to households .

Of particular interest is the current campaign in Switzerland aimed at a referendum on the transfer of 7500 francs to each citizen. In the Swiss context, it is not so much about stimulating growth and demand as it is about devaluing the Swiss franc. Therefore, it is also a form of helicopter money. There is less and less doubt among academics that this form works and is possibly much more effective than quantitative easing. However, further research should be done before actual implementation to know exactly how effective it is.

Of all the major central banks, we believe that as early as 2021-22 the Fed could be the first to introduce digital currency to quickly deliver money to citizens from a helicopter. Along with launching an aid program for medium-sized companies and striving to achieve average inflation in order to prioritize full employment, Federal Reserve proved that she wants to have more contact with society and focus more on the real state of the economy than on the development of the stock market. Such a move is currently unlikely in the euro area due to high technical and political constraints. Unlike the Federal Reserve and People's Bank of China, the European Central Bank is not yet in a position to plan direct transfers to households, but as is always the case with a new political option, it is likely that eventually, with some delay, it will follow its path. counterparts.