By Michael Baxter, Fresh Business Thinking
In the post Civod-19 world, should government resort to electronic money printing press to resuscitate the global economy? In short, will it be time for helicopter money?
In the classic western, the US cavalry came riding over the hill to the rescue of ‘brave’ pioneers. After the financial crisis of 2008, instead of the 7th cavalry, it was central bankers who rode to the economy’s aid, the then Bank of England Governor, Mervyn King on his charger, the Fed chair, Ben Bernanke, with sabre in hand. Maybe this time it is metaphorical helicopters, stacked with money, fresh off the printing press, scattering cash across the land that — otherwise known as helicopter money — can save us.
At times like these, it seems crass to worry about money — human lives come first, of course, that is right, but in long run the economy shapes human lives for better and worse. In times of crisis, when surviving the next few weeks is our priority, we do need to at least spare some thought for our future — our future selves and children depend upon it.
The economy is tanking. There is no doubt that the economy will see its worse recession since the Second World War. But what will the recovery be like?
In the US, unemployment is surging at a terrifying rate and seems set to hit its highest level since the Great Depression. Across Europe, it will be a similar tale, although various government stimuluses schemes will soften the blow.
Not like 2008
From an economic point of view, however, this crisis is different from previous economic downturns. The 2008 crash heralded the deepest economic slowdown since the Second World War. This time, the short term economic damage will probably be even worse. On the other hand, the 2008 recession, just like the previous one, was caused by structural problems with the economy. In the case of the 2008 recession, those structural problems related to banks. So, we got a banking crisis, and history tells that banking crises always leave a deep scar that takes longer than normal to heal.
This time, the crisis of our times is not caused by structural issues with the economy. It is caused by a virus. We could get into a debate that Covid-19 was a symptom of deeper ills, but let’s not get into that now.
Unlike in 2008, you could argue that there were no fundamental structural problems with the economy, that human and physical capital is still there. Sure, some companies may go bust, but the knowledge behind these companies will not disappear, nor the physical infrastructure.
What will be a problem, post Covid-19, is the massive level of unemployment which in turn could mean very little consumer demand sloshing around the economy. As a result, there is a risk that the recovery, despite ample spare capacity, will only recover very slowly.
The great economist John Maynard Keynes believed that in extreme scenarios of weak aggregate demand, governments should stimulate the economy with spending. In extreme circumstances, Keynes even talked about burying money in the ground and leaving it there for people to discover. (He was I think talking metaphorically.) He also advocated, in these extreme circumstances, redistribution from rich to poor, as the poor tend to spend more as a proportion of income.
There are two snags with the Keynes idea that are not commonly understood. First of all, after he died in 1946, other economists hijacked his ideas and tried to apply them to even out the economic cycle. This approach eventually ran into trouble, giving Keynes a bad rap for an idea he never actually advocated.
The other snag is that to be effective, a Keynesian stimulus must be massive. Alas, it is nigh on impossible to get political support for a real, bona fide, Keynesian stimulus in peace time. The last true Keynesian stimulus came with last world war, and guess what, after a brief pause, the Western economy enjoyed its strongest quarter of a century of economic growth ever.
Right now, it feels like wartime. Governments are applying wartime like thinking. Maybe, for the first time in over 70 years, we are getting another one of those Keynesian stimuluses
But how, how on earth will such a stimulus be funded? Some predict decades of austerity and higher taxes to fund the interest on the resulting debt.
Some argue that that as a consequence, the rise of China and Asia in general will accelerate, and the decline in the West will hasten.
History does create precedent. The Napoleonic War was followed by the supremacy of the British Empire. The two world wars of the 20th Century saw the decline of Britain and the rise of the US. So, if Covid-19 is followed by the fall of America and the rise of China, it would seem to fit the pattern of history.
Debt to GDP
The first counter to that is that what matters is not government debt, but government debt to GDP.
If the Keynesian stimulus can give the western economy the shake it needs, and lift it out of the economic doldrums from these past 12 years or so, maybe GDP will increase so rapidly that government debt to GDP will fall rapidly on its own accord.
Add to the mix new technologies such as AI, data, (the so called fourth industrial revolution) and add to the mix that the Covid-19 crisis seems to be accelerating a corporate shift towards digital and automation technologies, then this massive stimulus may just be what the economy needs.
Super low interest rates
The second counter to ‘the woe is us, the West is finished’, argument, is that right now, the US government, UK government and governments across the developed world can borrow at incredibly low interest rates. In some cases, governments can borrow at negative interest rates. If borrowing is so cheap, why not take advantage of it?
The third argument is both simpler and more complex. Instead of borrowing money, why not print it?
To many people, the idea feels them with horror. It smacks of the ‘money grows on trees argument’— it is economically illiterate, they say.
But is it?
The idea has advocates across the economics field, spanning people whose views sit on the right, and those who sit on the left.
The late and great economist Milton Friedman, darling of the right, whose ideas inspired Margaret Thatcher, argued that in the event of a repeat of a 1930s style depression, if all else failed, money could be scattered across the land from a helicopter. Then, before he became chair at the Fed, and was merely regarded as the leading economist in the world on monetary policy and The Great Depression, Ben Bernanke said he too agreed in the possibility of such a helicopter money drop.
Some people, erroneously, think Bernanke applied that very idea when, as chair of the Fed, he initiated quantitative easing or QE. In fact, QE and money printing are not the same thing. QE involves swapping one asset (government bonds) for another (cash). It only amounts to money printing if the government never pays back the bonds. In fact, instead, across much of the developed world, in parallel with QE, governments imposed austerity.
Some economists, such as former chair of the now defunct Financial Services Authority, Lord Adair Turner, advocated using QE to fund government spending, maybe through buying bonds with zero interest and no maturity date.
The money supply
A growing economy probably needs a growing money supply. It’s simple maths. If there is no increase in the money supply, then the only way the economy can grow is if prices fall — and falling prices (deflation) can have all kinds of negative economic consequences.
That means we must look at how the money supply grows. In the past, when we had a gold standard; and every unit of currency in circulation was backed by gold somewhere in bank vaults, the money supply could only grow via finding new gold.
When the Portuguese and Spanish found gold in the new world, the corresponding rise in the money supply led to inflation in these countries and may have led to the demise of these former superpowers.
When the British found gold, the industrial revolution had begun in earnest, the result may have helped turn all that innovation of that period into economic growth.
These days, economies operate via what’s known as a fiat system.
Banks create money with their lending. To many people, this doesn’t feel possible, but in a much cited report, the Bank of England once confirmed this is indeed the case.
In short, in the modern economy, the money supply grows through debt. This means rising debt is essential for an economy to grow.
But rising debt, as the economist Hyman Minsky, once argued, creates credit bubbles.
The last credit bubble burst in 2008. Over the last decade, debts levels have been rising across the world, leading to fears of another crash.
The alternative way to increase money supply is by doing just that. Governments create money simply through central banks adding to their ledgers and providing the money to governments. Governments can, in turn, use this to fund tax cuts, tax credits, investment into infrastructure, or via schemes such as universal basic income.
Alternatively, they could use this money to pay off debt.
Risk of inflation
The risk with such an approach is that creating money in this way may create inflation.
That’s the downside from creating money to fund infrastructure — if inflation starts to rise, governments may find it hard to cancel half complete infrastructure programmes. If instead they provide tax cuts, or universal basic payments, such injections can be turned up and down, like a tap, depending on inflation.
One recent idea to have emerged is known as modern monetary theory, or MMT, whose advocates include US Congresswomen Alexandria Ocasio Cortez. MMT involves all government spending funded by new money, and using taxes, to be turned up or down, like a tap, to keep inflation under control.
There are two big dangers with creating money to fund government stimulus.
One relates to temptation. Give governments access to the money supply tap and they may get sucked in — like sailors from Greek mythology, seduced by the Sirens.
The other relates to confidence. Governments can only resort to the money creation approach if the public and markets have confidence in the money created. If they don’t believe in the government, they might start trading in other assets, such as beads, foreign currencies or bitcoins.
If a country opts for money printing in isolation, then it may experience a run on its currency, which could create enormous damage to the economy.
Countries in the eurozone can’t individually create money, instead this would have to be done by the European Central Bank (ECB) with all kinds of political ramifications.
If the US Federal Reserve, Bank of England, ECB and Bank of Japan we’re to simultaneously create money on behalf of governments it may work — after-all not all currencies can fall. But this requires a degree of global cooperation that runs contra to the way politics have been moving.
There is a risk, however, that if this was to happen, it may hasten the rise of China, and end dollar hegemony — with disastrous economic ramifications for the US.
So, it seems likely that international money creation would be required with the participation of China. This is why efforts to demonise China over, among other things, Covid-19, are so dangerous.
For me, and I argue this is my new book, Living in the Age of the Jerk, https://www.techopia.co co-authored with Julien de Salaberry, due for release soon, technology adds a whole new dimension to this story.
In the age that is coming, with automation and perhaps the sharing of autonomous cars, lack of aggregate demand could become a massive problem for the global economy. In such circumstances, regular helicopter money may become essential.