Do you hear that? The thwack-thwack sound of approaching helicopters? If not, don’t worry: you soon will.
Politicians around the world are putting an ever-increasing amount of pressure on central banks to pump more stimulus into the economy. It’s happened in Japan, where the newly-elected Government has leaned on the Bank of Japan to do whatever it takes to get inflation higher. It’s happened in the Eurozone, where the single currency has been saved (for the time being) by the promise of radical action by Mario Draghi’s European Central Bank. It’s happening here in Britain, where George Osborne yesterday put pressure on the Bank of England to “continue to support the economy” and has urged a debate over the inflation target. It will hang over Mark Carney’s Treasury Select Committee hearing today.
Meanwhile, over in the US, the Federal Reserve has adopted a new employment target and pledged to print money – quantitative easing – until it gets the jobs rate to that level.
And lurking in the background is the threat of helicopter money – that central banks may soon start colluding (co-operating?) with their political masters to help them fund a tax cut by printing money. Lord Turner, the head of the FSA, gave a lengthy speech last night insisting that doing so would not necessarily be inflationary, would not cause Weimar-style hyperinflation in Britain.
Now, this is all rather worrying, for two reasons. First, because central bankers are, rightly, notoriously twitchy about the notion of political interference. That interference is starting to happen. Second, because underlying this push for monetary loosening is a worldwide competition between different jurisdictions, trying to stimulate their economies by, in part, bringing down their currencies. This raises the prospect of a spiral of competitive devaluation across the developed world – an echo of the beggar-thy-neighbour policies of the 1930s.
So why, in that case, aren’t the central bankers (with the exception, perhaps of Bundesbank president Jens Weidmann) making more of a fuss about this? In large part because, institutionally, many of them are a touch guilty that they haven’t done more to confront the economic slump. This might sound strange, given, for instance, Bank of England rates are down at a record low of 0.5% and £375bn has been pumped into the economy under the quantitative easing programme. However, the reality is that central bankers could have done more – much more. For the kinds of things Lord Turner talked about in his speech this week – monetary financing of the deficit, helicopter money – are hardly new concepts.
In a speech in 2002, Ben Bernanke, now the chairman of the Federal Reserve, said that they were among the weapons in any central bank’s arsenal, saying, his choice quote being: “the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
(It was this speech which earned him the nickname “Helicopter Ben”) And he went further: he raised the prospect of buying up a foreign country’s bonds, something which hasn’t (yet) been raised in this recent crisis.
So, conceptually at least, we shouldn’t be shocked that central banks are now considering whether there’s anything more they can do to stimulate the economy. However, given we are already in unknown territory, with central banks around the world sitting on an unprecedented amount of government bonds, and given that this has hardly been judged an unqualified success, we can only guess at the consequences of unleashing full-blown helicopter money.