The Unconventional Moves Into The Realm Of The Conventional
As COVID-19 ravages our economies and upends our daily lives, policymakers are turning to a range of unconventional tools to counteract what is now looking more like an economic downturn of unprecedented scope. Radical ideas about printing money or unrestrictive government spending have now entered the mainstream debate in North America and Europe.
We are seeing government spending packages that are bigger than any in the darkest days of the 2008 crash. And, even these fiscal packages are considered by many still to be inadequate. Besides cutting interest rates, central banks are adopting unconventional means to contend with expected economic crisis. The most significant policy tool is what economists refer as “helicopter” money.
That is, the government treasury departments physically printing money and handing it directly to individuals, not unlike a helicopter dropping dollar bills from the sky. Nobel-prize winner Milton Friedman advocated this approach in situations in which economic growth declines and deflation takes
hold----- conditions many of us fear will be more evident everyday as the virus remains goes unchecked.
We recognize that conventional fiscal policy—selective spending or tax breaks—take too long to formulate and even longer to work their way through the economy. Time is of the essence as cities are in lockdown and borders are closed. The real issue, though, is how much money should rain down? The
US government is debating paying about $ 2,000 per taxpayer which does not seem to be adequate beyond a month or two.
economists are calling for governments to print money to fund deficits, so that there will be no constraint on the deficits required to deal with this crisis. Former Fed chairman, Ben Bernanke has gone on record supporting monetarizing the deficits in extreme circumstances. Every year the Bank of Japan
buys all the government debt issued that year, so that the outstanding amount of private debt owned in Japan does not increase.
Monetarizing the debt, once considered as heresy, began to gain wider acceptance during the rescue of the banks worldwide in the 2008 financial crisis. The handling of that crisis did not produce the huge inflation, contrary to what many critics warned. In Europe, the ECB does offer loans directly to corporations at favorable rates, a much more effective way of using fiscal policy which can take more time implement because of domestic politics.
The scale of this economic crisis is such that the time has come to adopt once radical policies such as helicopter money and unrestricted government spending. Early indications in North America are that millions will be added to unemployment rolls and the depth of the contraction could well be in the
double-digits for the balance of 2020. Central banks and governments are not yet at the point of unleashing unconventional policies, but this may happen sooner than we think.