It's time to give away money [Helicopter Money]

It's time to give away money [Helicopter Money]

Over the past few days, politicians have been offering economic measures to mitigate the effects of COVID-19:

• French President Emmanuel Macron declared that the state is "waging war" with the virus and announced that it would do "everything possible at all costs" to save the economy. In yesterday's message, he made a bold promise that "nobody would go bankrupt" and the government would give small and medium-sized enterprises a state guarantee of EUR 300 billion.
  
• A few days earlier, the German government pledged to provide unlimited resources for companies losing COVID-19, and launched a real financial basebook of EUR 550 billion to protect the business sector, including loans and loan guarantees from the national development agency KFW.
  
• Following the example of Hong Kong (which paid out 10 HKD to all permanent residents), American politicians and economists are beginning to discuss the possibility of direct payments. Yesterday, Senator Mitt Romney called on the government to pay directly to US $ 000 for every adult American in order to "increase spending in the economy" (his crisis measures are presented below this article). Jason Furman and Greg Mankiw from Harvard University, former Presidents of the Board of Economic Advisors during the presidencies of Barack Obama and George W. Bush, proposed a similar program.
  
• Bill Dudley, a former New York board member Federal Reserve, he suggested that the transfer of government money should be directed to the population instead of businesses to mitigate the effects of lost income.

Even before the crisis began, Olivier Blanchard of the IMF and former advisor to President Macron, Jean Pisani-Ferry, supported the distribution of money as a "replacement of the still absent fiscal capacity ( fiscal capacity) ”Of the euro area (November 2019).

Helicopter money will work?

All these activities may not mean giving away strict sensebut they resemble them a lot. This concept is essentially based on the assumption that central banks should pay money to citizens (hence the name 'quantitative easing for the population') to increase their purchasing power, instead of directing assistance to banks, as was the case during the previous crisis. It is easy to see why this concept is clearly politically attractive, especially in times of turmoil. In slightly more than a decade, we went from "saving the banks" in 2007-2008 to "saving the SMEs and everything else" regardless of the cost in 2020

The examples above relate more to fiscal support, but the inspiration for it was clearly "helicopter money" in the sense that governments literally distribute money to citizens, particularly in the event of cash withdrawals, to prevent the entire system from collapsing. The basic assumption is to flood the economy with unlimited cash to prevent the crisis from getting worse. These transfers increase public debt and are ultimately financed by treasury bonds, which will most likely be acquired by central banks. At this point, it is worth remembering that over 70% of German government bonds and over 60% of French government bonds are held by central banks at a global level.

As the economic effects of the COVID-19 pandemic become more apparent in the coming weeks, the concept of "helicopter money" will certainly gain more and more supporters among politicians. Central banks have done everything to provide liquidity to markets and keep interest rates low over the past two weeks. The problem is that low interest rates do not automatically cause a significant increase in private investment and consumption. Central banks can lower rates as low as possible, but if there is not enough demand and small and medium-sized enterprises are struggling with cash flow and a future decline in confidence, the economy machine will not be restarted. The distribution of money can provide relief for the economy in the short term, strengthen the financial reserves of enterprises and stimulate demand, provided that these measures will not constitute savings (which, unfortunately, may affect many European countries). However, this massive inflow of money into the system, resulting from both fiscal and monetary incentives, will have consequences and may exacerbate inflationary pressures in the long run, unless it remains under control.

Source: Christopher Dembik, director of macroeconomic analysis in Saxo Bank