Helicopter money is moving onto central banks’ radar as they run out of ammunition to stimulate economies, says Robeco’s Lukas Daalder.
It follows fears that after years of historically low interest rates that in some countries are now negative, and endless quantitative easing through bond purchases, the time may be coming to give cash directly to the public.
Under this kind of drastic action, money is metaphorically thrown out onto the streets from a helicopter, though in reality it would be paid into millions of private bank accounts. While directly stimulating public spending, it has the added bonus of creating much-needed inflation, or at least staving off deflation.
“Monetary policy is running out of steam, and the time may be approaching for a more radical solution to economic stagnation,” says Daalder, Chief Investment Officer of Robeco Investment Solutions. “Trying to stimulate economies by taking the financial markets route is pretty indirect. Lower interest rates and bond yields seem to have lost their ability to stimulate the economy and might even have become part of the problem.”
“Buying more bonds and pushing the yield curve further into negative territory appears to be losing its effectiveness, though that does not mean that the central banks are running out of options. With a printing press at your disposal, you can go a long way, as long as you are willing to make the jump.”
“One option is to expand purchases into Real Estate Investment Trusts (REITs) or equities, a step already taken by the Bank of Japan. Although this has the advantage that it does not affect interest rates and yields, it is still a pretty inefficient way of trying to stimulate the economy.”
‘Where there is a will, there is a way’
“A more direct way would be to finance public spending directly or set up and finance an infrastructure investment fund. And the most direct route of all would be to take the big step of handing out money directly to people, popularly known as QE for the people, or helicopter money.”
“For sure, all of these options come with risks and (legal) limitations, and have been considered too radical in the past. However, faced with the risk of a loss of confidence in central banks and the financial system at large, or going for the next step of helicopter money, the outcome is probably going to be for the second option. Where there is a will, there is a way.”
Daalder cites five reasons why the methods used so far, led by QE and negative rates, won’t work for much longer:
“These arguments all seem to point in the direction that monetary policy is indeed experiencing diminishing returns,” says Daalder. “The recent experience in Japan in introducing negative rates, although clearly frustrated by the turmoil in the international financial markets, only serves as a clear example that a small additional rate cut can lead to a negative outcome.”
“Given the crucial role that central banks have played in the developments in financial markets, either indirectly (by supplying the famous ‘put option’ under the stock market) or directly (by buying bonds), it is clear that this credibility issue is not without risks. The fact that during the last six months all three of the major central banks have triggered sell-offs in the stock markets (the Fed in September 2015, the ECB in December 2015 and the Bank of Japan in February 2016), does not help confidence either. Faith in monetary policy appears to be wavering.”
Daalder says such negative reactions may prompt central banks to resort to drastic action to try to restore their credibility. “If the medicine starts to hurt more than the good that it does, it is clear that this raises concerns about the credibility of the policy pursued, if not central bank policy at large,” he says.
“This does not mean we are heading for a meltdown of confidence in central banks and with it the financial system at large. But the ‘things would be a lot worse if we had not done this’ argument by central banks is impossible to test so long as they are all pursuing the same policy mix. And there are some clear signals though that this ‘more of the same’ approach is reaching the end of the line in terms of effectiveness.”
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.