Victor Ventura – 6:02 – 26/03/2016
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The voices in favor of the dust more radical weapon of central banks grow in recent months
When the Nobel laureate Milton Friedman suggested in 1969 the idea that a central bank attacked by the deflation give away money to its citizens to stimulate consumption and create inflation, a theory known as “helicopter money” (throwing money from a helicopter), probably he did not imagine that among his audience would be Mario Draghi, ECB president and head of the second most used currency in the world that has called this blasphemy to monetary orthodoxy “very interesting idea.” But half a decade of existential crisis of the European currency and inflation stuck at 0% have ended the barrier between reality and imagination.
Every day that passes, the group of supporters of dusting helicopters grows a little more. A few weeks ago, the British weekly The Economist launched the idea as part of an “unconventional strategy” to revive the European economy, while analyst Mark Gilbert Bloomberg wondered “if all else has failed, why not? “. Meanwhile Richard Clarida, a professor at Columbia University, predicts the arrival of “a measure of this kind, albeit disguised in the next 10 years, if not in the next 5″. And the ECB chief Peter Praet, an economist does not deny the rumors, but in an interview last March 18, saying only that “there are other options available before” and that “we must scoring with time to take such a decision “, while accepting that” all measures are possible “
the operation of the measure is, in theory, simple. the government would issue bonds and the central bank in question would buy them, promising quedárselos forever. The Government would proceed to distribute the money among citizens, either in their current accounts income or tax cuts. The increase of money in circulation and the increased consumption of citizens, which would receive a “pay extra” would cause inflation, one of the most desired goals in the Euro zone or Japan. And the trick could only be done once, or all economic agents begin to expect cash injections from time to time.
If the theory sounds simple, execution is more difficult. On the one hand, the central bank would have to ensure that the bonus would stay forever, or else it would become a new round of quantitative easing (QE) as the ECB has applied for a year. The difference is that the ECB debt purchase within the QE program should be returned in the future, ie, is not “free money” they can spend no more but a loan to repay. But stay forever bonus would create “huge holes in the balance sheets of the entity” in the words of Bundesbank President Jens Weidmann.
On the other hand, the ECB has a legal problem: its founding treaty prohibits directly fund members mutualise debt or states. You can search for a shortcut, as it was found to apply the QE, but its implementation would be very complex, “both the accounting aspect and the legal”, as recognized by the Draghi himself, who denies having seriously studied the idea.
when put into practice, it would also arise the problem of how to make money available to all citizens. A lower taxes, income probably be the most direct, it would be regressive, since most in need of free money are precisely those who have no income to declare (young, unemployed, minimum wages). And a direct current account income would overlook the unbanked, usually the most vulnerable.
The last hurdle is that to work properly, the measure should be applied after a strong period of stagnation. With core inflation around 1% and a moderate but positive growth in the eurozone, the risks may outweigh the benefits. In Spain, for example, a “home” version applied by the president Jose Luis Rodriguez Zapatero in 2008, with a deduction of 400 euros each taxpayer in charge of budgets for that year is remembered. The move was just a blow against the tornado that pounced on the country’s economy a few months later.
On positive side, go to the end and give money to citizens could give more direct results than years QE, which have the side effect of increasing asset prices unrealistically and therefore could end up causing a future bubble. Perhaps the most likely suspect is the Bank of Japan, plunged into an endless crisis for two decades, who has been buying government debt last month to reach 359 trillion yen (3.2 trillion dollars). If one day get tired of monetizing the debt without any effect on inflation and consumption could try to give the money directly to citizens, although there seems little appetite yet.
Still, Brookings Institution economist Kemal Dervis insists that there is a simpler measure to fall back before the release of money: cooperation between countries. If the Fed raises its rates and destroys attempts to Europe and Japan to devalue their currencies, all return to square one. Only when the currency wars and measures in opposite directions have come to render useless the traditional mechanisms could happen is someone to look at the legendary helicopter. If countries coordinate their decisions, he says the Turkish economist, even the most orthodox solutions could work again.
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