Calls For “Helicopter Money” Grow As G7 Meeting Betrays Global Growth Jitters

Finance chiefs from the G7 economies are meeting in Japan this weekend ahead of next week’s G7 summit. At the top of the agenda: sluggish global growth.

As anyone who follows global macro is acutely aware, Japan is in many ways the poster child for subdued economic activity. Last year, the country received the rather dubious distinction of succumbing to a rare “quintuple dip” recession and despite the best efforts of BoJ governor Haruhiko Kuroda, Japan has been unable to shake the deflationary impulse. Desperation kicked in long ago and manifested itself most recently in reports that Prime Minister Shinzo Abe will delay a planned consumption tax hike for the second time and bold commentary from Finance Minister Taro Aso who last week promised to intervene in the currency market in the event an “excessively” strong yen imperils the country’s exporters.

Given the above, I suppose it’s appropriate that Japan is playing host to the gathering. “There are downside risks to the global economy," Abe told lawmakers this month. “Uncertainty over the global economy on the rise,” Aso said, in a Thursday briefing with reporters.

This may sound like a rather dry topic, but the numbers really are disconcerting pretty much across the board. Have a look, for instance, at Deutsche Bank’s G7 forecasts:

That’s pretty anemic, to say the least.

The problem - and this is well worn territory by now - is that monetary policy simply isn’t working any longer. The effects have faded over time as central banks have proven no exception to the law of diminishing returns. Here’s a look at the cumulative effect of multiple iterations of QE on inflation breakevens as well as a snapshot of how growth forecasts have changed, both via Citi:

“The global recovery has weakened further and the outlook across countries remains uneven and largely weaker than in the previous two decades,” Moody’s Elena Duggar warned on Wednesday, adding that “global trade remains subdued, while spillovers from emerging markets shocks to financial markets globally have increased substantially.” Moody’s is predicting growth of just 1.7% for advanced economies this year. The chances that EM will drag down developed markets is heightened by USD strength. A strong dollar accelerates EM outflows and makes it more difficult for EMs that have borrowed in dollars to service their debt.

So what’s to be done? Well, that’s what leaders gathered in Japan for the G7 summit will be discussing. Stimulative fiscal policy is of course high on the list of possible tools. “Deploying fiscal stimulus steps could help boost growth,” Abe said. "This view is shared among Japan, the United States, Canada, Italy, France and the European Union," Reuters quotes the PM as saying yesterday.

That view, as it turns out, is also shared by at least one member of Sweden’s Riksbank.

Sweden, you’re reminded, is in a rather precarious position. The country’s central bank is effectively beholden to the ECB. If Draghi eases, so too must the Riksbank, lest the SEK should skyrocket against the EUR and undercut Sweden’s efforts to drive inflation higher and stay competitive in the global currency wars. At the same time, QE and negative rates have driven the country’s housing market into the stratosphere, a situation which pretty clearly poses a systemic risk in desperate need of a macroprudential solution.

But as is the case virtually everywhere else unconventional monetary policies have been deployed, Sweden is essentially ignoring the perils of an overheating housing market in order to keep the easy money party going. On Thursday, in remarks made at Kammarkollegiet’s capital market day, Deputy Governor Cecilia Skingsley asked a simple question: “If monetary policy seems to have lost its magic touch, what can central banks do?“

Then, after admitting that the Riksbank’s autonomy is constrained by the ECB, she hinted at the nuclear option: helicopter money. “It is probably something that should not be tried until other possibilities have been exhausted,” she said. “However, considering the difficulties that are weighing many of the world's economies down, I think that it is wise to discuss the different possibilities, without closing any doors.”

Note that helicopter money, whether implemented in the form of a giant tax rebate or in the form of a central bank-financed infrastructure spending program, is a fiscal policy solution to the problem of anemic growth and the calls for such measures are growing louder.

It is in many ways astonishing that this is an option being considered not only by the likes of Citi’s Willem Buiter, but also by prominent central bankers. In the case of QE, excess liquidity can be removed from the system by the Fed. That’s not the case with helicopter money - you can’t exactly conduct reverse repos with private citizens.

As the chorus of those calling for stimulative fiscal policy grows louder (and the G7 meeting will be a good test of how much support there is for coordinated fiscal stimulus), it will be interesting to gauge policymakers’ willingness to take the helicopter route.
One thing seems certain: if officials resort to sending out free money in the mail, not even the most obtuse of citizens will fail to make the connection between the check they just got from the government and the implications for inflation. At that point, I imagine inflation expectations will rebound rather quickly - to dangerous levels.

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