The United States has launched the largest economic stimulus package in its history to tackle the effects of the coronavirus on the world’s first economy: 2 trillion dollars (1.85 trillion euros) which include, among other direct aids and facilities to obtain credit for SMEs and large companies, the use of what is known as ‘helicopter money’, that is, direct injections into the pocket (to the account) of the citizen, in this case there will be both payments to both adults and each child, to flood the dollar economy and revive consumption. What are the implications of this measure and why is it difficult for it to be used, for example, in Europe?
It is not a new concept, but it is true that in recent times it has been turning to it as one more option to consider at a time when central banks are running out of ammunition to cope with the negative effects of Covid-19 about the economy. Months ago it was speculated with the possibility, even, that the European Central Bank (ECB) approves such a measure, although in the case of the euro zone it is very complicated for two reasons.
First because the states that share currency do not have a common Treasure -It is the haciendas of each country that control the data of the citizens who could benefit from it. And secondly, because there is no convergence between the economies: 1,109 euros (the equivalent of what the US is going to inject into the pocket of each of its adult citizens) are not the same for a Finn or a German as for a Greek or a Portuguese.
In practice, this measure assumes that the central bank prints a large amount of money to distribute it directly among the population, in order to stimulate the economy in a period of recession or when interest rates remain at zero. Despite the fact that, as the analysts of the broker explain IG shares with the ‘QE’ or quantitative expansion that its objective is to stimulate consumption and increase inflation, the way of doing it is different. The ‘QE’ (quantitative easing, for its acronym in English) increases the money supply through the purchase of different financial assets, such as sovereign bonds; meanwhile the money helicopter would make it distributing large amounts of euros to the population to revive the economy, without the acquisition of another asset or a real counterparty.
Advantages and disadvantages
By assuming a direct injection of money, the helicopter does not generate debt and interest rates can be kept low. Since its impact is immediate on household demand, it more directly encourages spending and economic growth. However, other economists warn that it is not a viable solution and that it can cause damage to the central bank’s finances.
The main problem is that it can generate hyperinflation, by strongly devaluing the local currency. “As more money is printed, the value of it could decrease significantly, and could also discourage investors from buying it, as its yield potential would decrease,” experts say.