Over the weekend we wrote about Goldman's "Great Dilemma" and now Barclays offers the "Conundrums Of A Policy Maker" but the conclusions are both the same, namely that the ability of central banks and sovereign governments to control asset prices through reckless monetary and fiscal policy is reaching the end of its useful life.
Per Barclays, the "conundrum", whereby every "typical" stimulus option at the disposal of central banks has been stretched to its absolute max, leads to only one logical conclusion when the next exogenous market shock threatens bubbly asset prices and calls for central banking action: helicopter money.
As Barclays points out, economic stimulus from central bank rate policies were "maximized" long ago with over $13 trillion of sovereign debt now trading with negative yields.
QE programs picked up where falling rates left off but have stretched central bank balance sheets.
Meanwhile, Barclays forecasts that the ECB will reach spending caps on purchasing European government bonds by the end of Q1 2017.
As central banking policies were maxed out, more accomodative fiscal policies took over as the next bastion of hope. But, alas, the world's economies have already stretched their balance sheets to the highest levels as a percent of GDP since World War II...
...meanwhile, growth has slowed for pretty much every developed economy in the world despite ballooning sovereign balance sheets.
Finally, as Goldman points out, while central banking and fiscal policies have worked wonders in creating asset bubbles they have done little to improve the actual economy as job, wage and GDP growth continues to disappoint.
And so, all of that leads to one logical conclusion as typical monetary and fiscal policies become increasingly ineffective...helicopter money. As Barclays points out, helicopter money can take on many forms including printing bills and handing them out to citizens (ie. Friedman’s ‘helicopter’), tax cuts or government spending increases. Increased government expenditures can be funded by central banks directly crediting government accounts or through bond issuances that are subsequently converted into "non-interest bearing, non-redeemable debt." In other words, helicopter money is fairly similar to existing QE programs with one simple "tweak" whereby central banks explicitly convert government debt to 0% interest, perpetual securities.
The only difference of the ‘helicopter’ versus a combination of a ‘QE financed’ fiscal expansion is the permanence in the monetary base expansion (which implies unchanged ‘government debt’)
This could help overcome the ‘Ricardian equivalence’ challenge (ie. private agents anticipating future tax increases to pay down government debt)
However, in principle, a central bank can also issue its own interest bearing, redeemable paper (ie. debt) again, if it wanted to reduce the monetary base. Indeed, in a world where interest rates are already zero (or negative) and debt maturities are long, the difference between ‘bonds’ and ‘money’ is already blurred
Indeed, ‘helicopter’ policy essentially removes the (artificial) separation between the fiscal and the monetary authority, ie. the power to tax and the power to create fiat money. However, this separation has been established not for ‘technical’ but for political economy reasons: How can one assure the helicopter is landed in time, when the policy is successful and inflation returns?