Just 2 short months ago we warned of the rising voice among the cognoscenti tilting their windmills towards the concept of “helicopter money,” as Deutsche bank noted, “perhaps there’s an increasing weariness that more QE globally whilst inevitable, is a blunt growth tool and that stopping it will be extremely difficult (let alone reversing it) without a positive growth shock.” Committing what Commerzbank calls “the ultimate sin” is now reaching the mainstream as Germany’s Der Spiegel notes it is becoming increasingly clear that Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation; and many economists are demanding that the European Central Bank hand out money to consumers to stimulate the economy.
It seems perhaps tomorrow is… today… As Der Spiegel explains…
Fears that the euro zone is heading for deflation refuse to abate. Now, many economists are demanding that the European Central Bank hand out money to consumers to stimulate the economy. But would it work?
It sounds at first like a crazy thought experiment: One morning, every resident of the euro zone comes home to find a check in their mailbox worth over €500 euros ($597) and possibly as much as €3,000. A gift, just like that, sent by the European Central Bank (ECB) in Frankfurt.
The scenario is less absurd than it may sound. Indeed, many serious academics and financial experts are demanding exactly that. They want ECB chief Mario Draghi to fire up the printing presses and hand out money directly to the people.
The logic behind the idea is that recipients of the money will head to the shops, helping to turn around a paralyzed economy in the common currency area. In response, companies would have to increase production and hire more workers, leading to both economic growth and a needed increase in prices because of the surge in demand.
ECB Has Lost Control
Currently, the inflation rate is barely above zero and fears of a horror deflation scenario of the kind seen during the Great Depression in the United States are haunting the euro zone. The ECB, whose main task is euro stability, has lost control.
In this desperate situation, an increasing number of economists and finance professionals are promoting the concept of “helicopter money,” tantamount to dispersing cash across the country by way of helicopter. The idea, which even Nobel Prize-winning economist Milton Friedman once found attractive, has triggered ferocious debates between central bank officials in Europe and academics. For backers, there’s more to this than just a new instrument. They are questioning cast-iron doctrines of monetary policy.
One thing, after all, is becoming increasingly clear: Draghi and his fellow central bank leaders have exhausted all traditional means for combatting deflation.
‘It Has To Be Massive’
Daniel Stelter, founder of the Berlin-based think tank Beyond the Obvious and a former corporate consultant at Boston Consulting, has even called for giving €5,000 to €10,000 to each citizen. “It has to be massive if it is going to have any effect,” he says. Stelter freely admits that such figures are estimates. After all, not a single central bank has ever tried such a daring experiment.
Many academics have based their calculations on experiences in the United States, where the government has in the past provided cash gifts to taxpayers in the form of rebates in order to shore up the economy.
Oxford economist John Muellbauer, for one, looks back to 2001. After the Dot.com crash, the US gave all taxpayers a $300 rebate. On the basis of the experience at the time, Muellbauer calculates that €500 per capita would be sufficient to spur the euro zone. “It (the helicopter money) would even be much cheaper for the ECB than the current programs,” the academic says.
It is an experience Germany became familiar with in the 1920s. The trigger for hyperinflation at the time was, of course, the fact that the German Reich paid for its wartime expenses by printing money. But the situation got out of control when the state’s creditors along with its citizens lost faith in the mark. Investors refused to make more money available to the state and doctors began demanding barter in exchange for services rendered. Prices exploded, to the point that a loaf of bread ultimately cost 140 billion marks.
“Once people have experienced money raining down from the heavens, it will create vast uncertainties about future inflation,” warns Commerzbank economist Krämer. “How often might it happen and how quickly will prices climb? What kind of shape must the euro be in if the ECB has resorted to giving out money?”
So is the “Ultimate Sin” about to be unleashed…? As we concluded previously, this was always in the playbook – Indeed it is, as we warned last September in “Bernanke’s Helicopter Is Warming Up” and yet everyone will be shocked, shocked, when the playbook that was clearly revealed by Ben Bernanke himself in 2002 is finally implemented:
… A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money
– Ben Bernanke, Deflation: Making Sure “It” Doesn’t Happen Here, November 21, 2002
Full article: “The ECB Has Lost Control” – Spiegel Asks If “Helicopter Money” Comes Next? (Zero Hedge)