Lockdowns and Helicopter Money Lockdowns and Helicopter Money Lockdowns and Helicopter Money

Lockdowns and Helicopter Money

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  While France is expected to be the next EU country to announce a national lockdown to combat coronavirus pandemic tonight, pressure is significantly mounting on central banks to take further steps to support aggregate demand and fight against deflationary forces resulting from the COVID-19. Once unimaginable, central banks are increasingly likely to resort to some form of Helicopter Money in coming years to deal with lasting scars from the pandemic.


-France’s new lockdown could cost up to €60bn-

After a strong but partial rebound in Q3 following the lift of the lockdown, there is no doubt anymore that Europe and probably the United States are facing an outright QoQ contraction in Q4 due to a renewed spread of the virus and the implementation of further restrictions. On this matter, Europe is a few weeks ahead of the United States, with France being probably the next EU country to announce a national lockdown to fight against the virus tonight. Germany is also expected to take a similar step in the coming days with the reintroduction of a two week “wavebreaker” lockdown that would implies the shutdown of everything besides schools, kindergartens and essential retailers. The economic damage will certainly be massive. Based on the previous work of France’s National Institute of Statistics and Economic Studies (INSEE), a rough estimate of the economic loss resulting from a one-month lockdown in France could be up to 60bn, without counting the unavoidable wave of bankruptcies that will follow in the sectors most hit by the restrictions, especially hospitality, restaurants and hotels.

-Further monetary accommodation in sight-

Given the speedy economic deterioration, all eyes are turning to central banks again, especially the ECB that is due to meet tomorrow. While we don’t expect any change in monetary policy at that meeting, the risk of W-shaped recovery along with the persistent fall in headline and core inflation will force Christine Lagarde to double-down on the ECB’s dovish monetary stance and to open the door to further stimulus at the December meeting. Not sending a dovish message to the market tomorrow would be a policy mistake as harmful as the rate hike of July 2008. The fact that many European governments are considering to extend all major corona support programs beyond year-end comes as a relief for the ECB that sees cliff edge in furlough and credit support programs as a major risk to growth in early 2021. However, further monetary policy measures are unavoidable. If the economy continues to weaken and the ECB officials need to provide further accommodation, increasing the pace and the total envelope of asset purchases is the most likely option, but not a particularly effective one in our view.

-The next step: Helicopter Money-

What was once unimaginable is becoming increasingly likely: we think that the only effective way for central banks to deal with the lasting scars from the pandemic is to implement some form of Helicopter Money coupled with digital fiat currency that would serve as medium of transfer for direct payments to households.

The current campaign in Switzerland to demand a referendum on whether to transfer CHF 7,500 to every Swiss citizen is of particular interest. In the Swiss context, the idea is not to stimulate growth and aggregate demand but rather to devaluate the Swiss franc. That being said, this is also a form of Helicopter Money. Among academics, there is less and less doubt that Helicopter Money works and is probably much more efficient than QE. But further studies need to be done before real implementation in order to know precisely how effective it is, what are the multipliers and the marginal propensity to spend when Helicopter Money is used.

Among all the main central banks, we think that the Federal Reserve could be the first one to launch a digital currency to swiftly provide Helicopter Money to citizens, as early as 2021-22. With the launch of the Main Street Lending Facility for midsize firms and the average inflation targeting in order to prioritize full-employment, the Federal Reserve has proved its desire to have a closer connection with Main Street and to focus more on the real state of the economy than on the evolution of the stock market. Such a move is unlikely for the moment in the eurozone due to high technical and political constraints. Contrary to the Federal Reserve and the PBoC, the ECB is not yet in position to plan direct transfers to households but, as it is always the case with new policy option, it is probable that the ECB will ultimately follow the path of its counterparts, with some delay.

Key macro events today (times GMT):

  • 1230 – US Sep. Advance Goods Trade Balance
  • 1400 – Canada Bank of Canada Decision
  • 1500 – Canada Bank of Canada Governor Macklem Press Conference
  • 1900 – Macron’s televised address to the Nation regarding the new lockdown measures
  • 2100 – Brazil Selic Rate
  • 2200 – US Fed’s Kaplan (FOMC Voter) moderating a panel discussion
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 Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo 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.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

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