It’s time for free money It’s time for free money It’s time for free money

It’s time for free money

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  As the coronavirus outbreak is hitting the economy, the concept of helicopter money is coming back into vogue again. The latest policy measures proposed by Western policymakers are not strictly speaking the implementation of helicopter money, but it looks a lot like it.


Over the past few days, policymakers have proposed bold economic measures to tackle consequences of the COVID-19:

  • France’s Emmanuel Macron declared the country “at war” against the virus and claimed he will do “whatever it costs” to save the economy. In his speech to the Nation yesterday, he made a bold promise saying “there will be no bankruptcy” and that the government will offer €300bn of state guarantee to SMEs.

  • A few days earlier, Germany pledged unlimited cash to businesses hit by the COVID-19 and deployed a financial bazooka of €550bn to defend businesses that includes both loans and credit guarantees provided by the state development agency KFW.

  • Inspired by the example of Hong Kong (cash handout of HK$10,000 to all permanent residents), US economists and politicians are discussing direct cash handouts. Yesterday, Sen. Mitt Rommey called for direct government payments of $1,000 to every American adult in order to “increase spending in the economy” (please see his proposal to counter the crisis at the bottom of the page). Harvard professors Jason Furman and Greg Mankiw, both former CEA chairs, respectively under President Barack Obama and under President George W. Bush, proposed the implementation of a similar framework.

  • Yesterday, Bill Dudley, ex Federal Reserve board member from New York, suggested to make transfers from the government to the people rather than to companies in order to deal with loss of income.

Even before the start of the crisis, IMF Olivier Blanchard and Macron’s former advisor Jean Pisani-Ferry advocated for the use of helicopter money as a “replacement for the still missing coming fiscal capacity” in the euro area (Nov. 2019).

Strictly speaking, all these measures are not helicopter money, but it looks a lot like it. The basic idea behind this concept is that central banks should give money to the people (that’s why it is also called “QE for people”), in order to increase their purchasing power, rather than helping banks like in the previous crisis. It is quite easy to understand why this concept has a clear political appeal, notably in period of turmoil. In a little bit more than a decade, we have moved from “bank bailout” in 2007-08 to “bailout SMEs and everything else” at any cost in 2020.

The above examples refer more to fiscal support, but it is directly inspired by helicopter money in the sense that governments are literally giving money away to the people, specifically in the case of cash handouts, in order to avoid the system fall down. The underlying idea is to flood the economy with an unlimited amount of cash to prevent the crisis from worsening. These transfers are causing an increase of public debt and are ultimately financed by government bonds that will likely be purchased by central banks. This is the good moment to remember that more than 70% of Germany’s sovereign debt and more than 60% of France’s sovereign debt are held by central banks at the global level.

As the economic impact of the COVID-19 outbreak is likely to be more visible in coming weeks, the concept of helicopter money will certainly generate more and more support among policymakers. Central banks have done their maximum over the past two weeks to make sure liquidity is flowing into the market and that interest rates remain at low levels. The problem is that low interest rates do not automatically induce a significant revival of private investment and consumption. Central banks can push rates as low as possible, if there is not enough demand and that SMEs are strangled by cash flow problems and lack of confidence in the future, the economic machine will not restart. Cash handouts could bring a short-term economic relief and help building businesses’ cash reserves and stimulating demand on the condition that cash is not saved (as it might unfortunately be the case in many European countries). But this massive flow of money into the system, both resulting from fiscal and monetary stimulus, is not without consequences and could spur inflationary pressures in the long run if not controlled.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.