Calls for helicopter money as central banks exhaust money printing

This week Ray Dalio, the founder of the world's largest hedge fund, Bridgewater Associates, which has some $155bn in funds under management, said that current unconventional efforts to raise economic growth through bond buying in the markets, which is called quantitative easing or more commonly money printing, have lost their potency and central banks may have to resort to radical measures such as "helicopter money." On Thursday the Organisation for Economic Cooperation and Development (OECD) — a think tank for 34 mainly developed country governments — said governments must act “urgently” and “collectively” to raise spending in advanced economies as it cut its growth forecasts against a backdrop falling trade and market turmoil. The OECD reduced growth estimates for every member of the G7 group of leading industrial nations — the US, Japan, Germany, France, UK, and Canada.

On the publication of the first Economic Outlook of 2016, the OECD urged governments able to borrow at very low interest rates to boost spending on infrastructure. It said that if governments worked together, new borrowing could have such a positive impact on growth that it would reduce rather than increase their debts relative to economic output.

Catherine Mann, OECD chief economist, told The Wall Street Journal that without such action, governments wouldn’t be able to honour their pledges to deliver a better life for young people, adequate pensions and health care for the elderly, and the returns anticipated by investors.

The OECD lowered its forecasts for global growth this year and next. It forecasts the US economy to grow by 2% in 2016 and 2.2% in 2017, compared with November's expected 2.5% and 2.4%, respectively. The think-tank cut its respective growth forecasts for the Eurozone to 1.4% and 1.7% from 1.8% and 1.9%, and Japan's growth for 2016 to 0.8% from 1.0%. China's growth forecasts were unchanged at 6.5%.

The UK will expand by 2.1% down from a 0.3 point change while Germany's growth will be 1.3 per cent, a 0.5 point dip.

Overall, the OECD said it expected the global economy to grow by 3% this year, the same rate of expansion as in 2015 but slower than the 3.3% it anticipated in November.

Catherine Mann said:

Given the significant downside risks posed by financial sector volatility and emerging market debt, a stronger collective policy approach is urgently needed, focusing on a greater use of fiscal and pro-growth structural policies to strengthen growth and reduce financial risks. A commitment to raising public investment would boost demand and help support future growth.

Ray Dalio of Bridgewater said in a note to clients this week:

While negative interest rates will make cash a bit less attractive (but not much), it won’t drive investors/savers to buy the sort of assets that will finance spending. And while QE will push asset prices somewhat higher, investors/savers will still want to save, lenders will still be cautious lenders, and cautious borrowers will remain cautious, so we will still have “pushing on a string.” As a result, Monetary Policy 3 will have to be directed at spenders more than at investors/savers. In other words, it will provide money to spenders and incentives for them to spend it. How exactly that will work has to be determined. However, we can say that the range will extend from classic fiscal/monetary policy coordination (in which debt to finance government spending will be monetized) to sending people cash directly (i.e., helicopter money), and will likely fall somewhere between these two (i.e., sending people money tied to spending incentives).

To be clear, we are not describing what will happen tomorrow or what we are recommending, and we aren’t sure about what will happen over the near term. We are just describing a) how we believe the economic machine works, b) roughly where we believe that leaves us, and c) what these circumstances will probably drive policy makers to do — most importantly that central bankers need to put their thinking caps on.

We have discussed the origin of the concept of helicopter money here:

Living in unique economic/ financial times; Interest rates as low as in Babylonian times

This week we looked at long-term factors in the decline in expected growth:

Sun sets on decades of high growth in US, Europe & Asia

Ray Dalio, founder of Bridgewater Associates, shows the basic driving forces behind the economy, and explains why economic cycles occur by breaking down concepts such as credit, interest rates, leveraging and deleveraging: