Fighting the coronavirus crisis with “helicopter money”?

news-single-imgcaption" style="width:240px">Beat Thoma

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Western industrialized countries drew their shields of economic protection as quickly as the pandemic spread. Even the “helicopter currency” came into play with undoubtedly considerable consequences in the long term.

Central banks and governments around the world have deployed an unprecedented monetary and fiscal arsenal to counter damage from the coronavirus. Although the disruptions to the economic and financial systems had other causes than the 2008 crisis, the panoply of tools and stabilization mechanisms used at the time was reactivated very quickly and effectively.

Furthermore, Europe can count on the lessons learned from the crisis of the European currency. This experience is invaluable for effectively absorbing current shock waves.

Damage requires radical action

Stoppages of production, temporary closings of businesses and travel restrictions have plunged the world economy almost overnight into the deepest structural crisis in recent history. Unlike previous economic crises, it is an exogenous shock and not system-specific excesses.

It is imperative that governments respond quickly and massively to avoid damage to otherwise intact economic structures. It is impossible to quantify precisely the extent of the damage, which makes all the more necessary sufficiently strong measures, “as a preventive measure”, in order to prevent self-fulfilling prophecies from starting to take place. to the wave of panic that is spreading among the population and investors.

Monetary policy is not enough

So far, central banks and governments have responded in an exemplary and more than appropriate manner. The support measures are comparable to those of the past: unlike the great depression of 2008, the injections of liquidity made by the central banks are certainly absolutely necessary and must remain unlimited, but they are not enough to solve the problems of the economy .

This time, monetary policy is just one essential tool among many to preserve market liquidity, banks and payments. Losses of production and wages, on the other hand, must be compensated for by temporary aid and public subsidies.

This treatment was carried out very quickly, targeted and well proportioned. Public aid is allocated to support funds. Germany makes 600 billion euros available to large companies through an economic stabilization fund, or 17% of German GDP. Added to this is 550 billion euros earmarked for the public investment bank KfW to support small businesses and households.

Other governments are implementing comparable programs, usually up to 10% of GDP or more. Relative to the number of inhabitants, the 40 billion francs released by Switzerland correspond to the support plan put in place by the United States to the tune of 2,000 billion dollars. It remains to be seen whether these funds will ultimately be needed.

In any event, the payments actually made will significantly increase public deficits. This is not a problem for Europe in the short term. But in the long run, states will have their hands tied to deal with future crises and will be more dependent on monetary support from central banks. An uncomfortable trend that has lasted for a good decade.

Central banks take out “big artillery”

We are fast approaching “helicopter money”. In other words, central banks create money which they distribute to the population or indirectly through public spending to finance the repurchase of government bonds. In contrast, the usual quantitative easing (QE) only increases the liquidity of the banking system, but does not trigger new immediate public spending. The helicopter money thus created would no longer be withdrawn from circulation. The state should no longer repay loans, unlike previous QEs.

The Federal Reserve, the ECB and even the Bank of Japan are launching support programs that at least partially match the characteristics of helicopter money. Central banks are now also acquiring government bonds on the primary market. The Bank of Japan buys corporate bonds and stocks while the European Union plans to issue “corona bonds”. All of these purchases provide money for direct investment, not just cash injections.

This type of money creation is extremely effective and adapted to the situation. Experience also shows that the moderate and temporary use of helicopter money does not lead to inflation or a rise in rates. And insofar as the securities purchased remain for the time being on the balance sheets of central banks, their sale could subsequently withdraw this capital from the financial system. So there is reason to hope that the monetary and fiscal arsenal deployed against the virus will be effective.

* Chief Investment Officer, Fisch Asset Management

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