‘Gradual Shift Towards Helicopter Money’ seen by Citi Group

As countries struggle to boost growth and inflation in uncertain geopolitical climes, Citi group has forecast a “gradual shift towards helicopter money” by advanced economies.

It is widely expected that the Bank of Japan would launch another major stimulus program after its two-day meeting on Thursday and Citi’s report comes a day before hat meeting. A report by news agency Jiji said that a 28 trillion yen ($267 billion) fiscal stimulus package would most likely be announced by Prime Minister Shinzo Abe.

Citi defines helicopter money as “temporary fiscal stimulus financed by a permanent monetary expansion” and Abe’s stimulus could be viewed as a move towards helicopter money. Central banks injecting cash directly into the real economy is how others define it simply.

“Amid large uncertainties, the policy outlook is once again of major importance. In our view, there is a gradual shift in policy orientation towards helicopter money,” Citi analysts including Chief Economist Willem Buiter said in a report.

Urgent action is needed to short-circuit continued economic stagnation and damaging long-term unemployment, said Citi’s chief global economist Willem Buiter, currently visiting Australia for a series of meetings.

“Today’s unemployment creates the future unemployables – it leads to the deskilling and it leads to the stigmatisation of the unemployed,” he told a breakfast briefing of financial journalists in Sydney.

While preferably a sensible fiscal stimulus could help reawakening of animal spirits in the private sector, a big stimulus to demand like a war would do it. Dr Buiter said there are many sensible options open to governments while quipping about military boosts to demand. While preferably a sensible fiscal stimulus could help reawakening of animal spirits in the private sector, a big stimulus to demand like a war would do it.

“Most likely by deregulation or sensible tax reforms, infrastructure spending would also help,” he added. “Corporate tax cuts would be an obvious example, infrastructure investment, depending on the country, likewise,” he said.

Citi forecasts a new round of a quantitative easing from the Bank of England (BoE) next month and a “moderate further easing” by the Bank of Japan this week.

However in a radio interview broadcast by the BBC last week, the prospect of using helicopter money to underwrite Japan’s budget deficit was ruled out by Bank of Japan Governor Haruhiko Kuroda. The interview was conducted in mid-June, the BBC said. The BoE said that the bank surprised markets by holding interest rates at 0.5 percent this month and its governor Mark Carney said shortly after the Brexit vote on June 23 that “some monetary policy easing will likely be required over the summer”.

While Daiwa Capital markets said hopes of helicopter money were “bound to be dashed” and Bank of America Merril Lynch Global Research said this week that helicopter money from the Bank of Japan was “unlikely”.

On the other hand, if its economy experiences a very hard landing in China, it may be forced to consider helicopter money further down the line, Dr Buiter said.

(Adapted from CNBC & ABC)

Categories: Economy & Finance

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