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 Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.