What do Central Banks do when interest rates are around zero or even negative, and Quantitative easing does not seem to be offering much stimulus?
Some say the next thing is helicopter money. By this they mean the Central Bank creates new electronic money in an account (the modern version of printing notes or clipping coins) and gives it to people. The idea is they would then go out and spend. The sages think that if the economy is working below full capacity then the extra money spent will be more demand, and will bring more of the unused raw materials and labour into use. Clearly the conditions would have to be very unusual. Normally if a Central Bank prints more and gives it away or spends the cash it leads to more inflation. Those countries that have tried it to excess end up with hyperinflation, like Germany after the First World War or Zimbabwe more recently.
There are disguised or more elegant variants of helicopter money that are on the agendas of some with power in our modern world. Finland, a poster boy of Euro financial rectitude, is struggling with no growth and lower living standards as a result of the cruel Euro policies being followed. There the government is asking should it move to a system of basic income, where every adult, rich or poor, in work or out of work, is given a tax free basic income by the state. Most other benefits would be removed to partially offset the huge costs, but there would still be a big increase in total public spending from giving money to people not currently on benefits. The idea is work incentives would be bolstered, as there would be no benefit withdrawal as people took on paid employment. If the basic income is enough to get by on, the incentive effects may not be as sharp as some hope. If the basic income is not high enough to live on, then the state will have to carry on with an additional range of means tested benefits for those in poverty.
Some think this is a variant of helicopter money, but under the Euro scheme it is not. Finland cannot print the money to pay for the basic income. Only the ECB can print money, and it shows no signs of wanting to send newly created money to an individual state to pay for more spending, which remains against its rules. So if Finland wished to stick within the tough budget deficit controls of the Euro it would need to raise other taxes to pay the bills. If it was prepared to break the rules on deficits then it would borrow more to pay the bills, making this a normal fiscal stimulus akin to a tax cut.
Another variant is Mr Corbyn’s People’s Quantitative Easing. Under this model the Bank of England would create new money to buy the UK more infrastructure, or it would buy the bonds the state needed to issue to pay for infrastructure in the more normal way. It amounts to the same thing if the state in due course cancels the bonds it has bought up from the market in pursuit of its QE programme. If the extra borrowings have later to be repaid to the private sector, then it is simply a higher borrowing policy of the familiar kind.
I trust the Bank of England will not need to play around with such measures. Nor should the USA need them. Bond and property markets have been pushed quite high enough already by the large Quantitative Easing programmes already undertaken by the four leading monetary authorities of the world. In the Euro area they need to break up the zone so currencies can find their own levels against each other again, and individual Central Banks can follow money policies and set interest rates appropriate for their country. Far from needing more radical and possibly dangerous monetary policies, the Euro needs to go back to more reliable basics. Monetary authorities need to work with sovereign governments who have control over taxing and spending in the area of the monetary union. Together national Central Banks and governments in each country could fix the slow growth and no growth of parts of the current Eurozone. If the Eurozone is going to develop more it needs to get on quickly with its ideas of political union, a Euro Treasury, a common European budget, and much larger transfers from rich to poor. That is what we have in the sterling currency union, and the USA has in its dollar union.