Must-read: Martin Wolf: “Helicopter drops might not be far away”

Must-Read: The central banks of the North Atlantic seem to be rapidly digging themselves into a hole in which, if there is an adverse demand shock, their only options will be (a) dither, and (b) seize the power to do a degree of fiscal policy via helicopter money by some expedient or other…

Martin Wolf: Helicopter drops might not be far away: “The world economy is slowing, both structurally and cyclically…

…How might policy respond? With desperate improvisations, no doubt. Negative interest rates… fiscal expansion. Indeed, this is what the OECD, long an enthusiast for fiscal austerity, recommends…. With fiscal expansion might go direct monetary support, including the most radical policy of all: the ‘helicopter drops’ of money recommended by the late Milton Friedman… the policy foreseen by Ray Dalio, founder of Bridgewater, a hedge fund….

Why might the world be driven to such expedients? The short answer is that the global economy is slowing durably…. Behind this is a simple reality: the global savings glut — the tendency for desired savings to rise more than desired investment — is growing and so the ‘chronic demand deficiency syndrome’ is worsening…. The long-term real interest rate on safe securities has been declining for at least two decades….

It is this background — slowing growth of supply, rising imbalances between desired savings and investment, the end of unsustainable credit booms and, not least, a legacy of huge debt overhangs and weakened financial systems — that explains the current predicament. It explains, too, why economies that cannot generate adequate demand at home are compelled towards beggar-my-neighbour, export-led growth via weakening exchange rates….

The OECD argues, persuasively, that co-ordinated expansion of public investment, combined with appropriate structural reforms, could expand output and even lower the ratio of public debt to gross domestic product. This is particularly plausible nowadays, because the major governments are able to borrow at zero or even negative real interest rates, long term. The austerity obsession, even when borrowing costs are so low, is lunatic (see chart). If the fiscal authorities are unwilling to behave so sensibly — and the signs, alas, are that they are not — central banks are the only players… send money… to every adult citizen. Would this add to demand? Absolutely….

The easy way to contain any long-term monetary effects would be to raise reserve requirements. These could then become a desirable feature of our unstable banking systems…. The economic forces that have brought the world economy to zero real interest rates and, increasingly, negative central bank rates are, if anything, now strengthening…. Policymakers must prepare for a new ‘new normal’ in which policy becomes more uncomfortable, more unconventional, or both…

March 25, 2016


Brad DeLong
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