Krishna Koundinya Mothukuru

No Free Lunch

The alternative to such a ‘crazy’ policy device are austerity measures leading to extended periods of recession. If it is a choice between free money with a caveat and strict austerity with hopes of stability in the future, the Central bankers and politicians would be forced to choose the former. The important caveat here is that, when the party is over (stimulus is withdrawn), even if the policy succeeds to meet its immediate objectives, there wouldn’t be any proportionate assets to balance the liability. One key benefit touted for Helicopter Money vis-à-vis QE is the absence of interest paid on reserves. The free lunch is received from the creation of non-interest paying money that can be freely distributed to the citizens (since central banks continuously buy government bonds but don’t pay any interest on holding it, of course, this goes on the assumption that the central bank will not sell the debt in the market, in which case there would be havoc). This ostensibly creates assets for the private sector (individuals and corporations) without a corresponding liability for the public sector (the central bank and the government). However, this is not true, since this would lead to ‘inflation tax’ or regulatory reserve requirements on banks later on.

To clear this liability, we have to create another liability and the vicious cycle ends in a gigantic Ponzi scheme, the likes of which we have never witnessed before in the history of the modern economy. Worse, people get used to the seemingly unlimited supply of free money, leading to too much money chasing too few goods. The confidence in money will eventually erode and people may shift to unconventional exchange mechanisms like Bitcoins (which will open the Pandora’s Box of new-age monetary issues with central banks having lost all control of  their economies) or good old fashioned commodities. This, combined with other ominous symptoms of developed economies- like an ageing demography, loss in technological advantages to the developing world, automation-cum-robotization leading to unemployment, does indicate that the woes are far from over.

No matter how innovative we get with policies, there cannot be any free lunch.

New Normal

The International Monetary Fund (IMF) in its report “Too Slow for Too Long” downgraded the economic growth for the world in 2016 and 2017. IMF tried to portray optimism in its earlier report “Uneven Growth: Short- and Long-Term Factors” in April 2015, but the cynicism has returned in its latest report, much in accordance with a phrase it coined “The New Normal”, urging policy-makers to shift their perception and downgrade their expectations of performance. Things are not going to substantially improve in the near future. IMF’s new normal will be reflected in the policy decisions taken by central banks.

Eight years ago, any central banker would have said that Quantitative Easing (QE) on the scale that the world witnessed is insane. With retrospect bias, now we can confidently state that what was once thought of as ‘extreme’ has become ‘normal’. Similarly crazy monetary and fiscal policies are no longer insane but to be given some due consideration.

The Onset of Normalisation of the ‘Crazy’ Helicopter Money

The Japanese Government is already thinking about distributing vouchers to households but they can only work effectively when tax increases are shelved (lesson from the late 1990’s), which Tokyo might do in 2017. A few months ago, Finland, which was considered as the poster-boy for austerity, considered giving each of its citizens a tax free pay-out worth €800 per month with a negative income tax (Finnish unemployment rate is at a record high-10.1%). Switzerland was next in the line for considering a very similar proposition (a national basic income). It held a referendum in June, 2016, to decide on a minimum pay. Last month, Bank of Italy’s Governor also hinted at Helicopter Money saying that no policy tool should be dismissed a priori since the inflation expectations are low leading to lower the wage outcomes, a sentiment not entirely dismissed by Mario Draghi himself. Canada has previously tried a poverty reduction program in 1974-1979, and is now launching a pilot program based on that which now possesses characteristics of Helicopter Money. France has constituted a parliamentary working committee studying the economic feasibility for universal basic incomes. The Netherlands is considering options like no-strings attached payouts, requiring volunteers to work for minimum hours, a mix of these two, or only supporting the unemployed (as the unemployment rate is at 6.9%). China is officially subsidizing its national banks by keeping the interest rates artificially low. Given its shadow economy, artificial bubbles in real estate & housing markets, devaluing the Yuan and low inflation rates in recent months, it also shows few symptoms.

The ‘crazy’ is not crazy anymore and slowly tending towards ‘normal’. Slowly but surely, Helicopter Money’s time is approaching and we better grab onto our seats and enjoy the ride, irrespective of how bumpy the ride might be.

This is the 3rd part of a 3 part series

Krishna Koundinya Mothukuru is an entrepreneur and writes on Foreign Policy, Economics and Law.

Posted by The Indian Economist | For the Curious Mind