It’s time to wean global economy off all that ‘helicopter money’

It’s time to wean global economy off all that ‘helicopter money’, by Adam Creighton.

Central bank helicopter squadrons have been out in force for years now, at least in Europe, Japan and the US. It’s just that so far they have been hovering exclusively above the world’s major financial centres, dropping rescue packs stuffed with billions of newly minted currencies.

Rare to see this discussed in  the media:

Banks create money independently of depositors and government. When they make loans they debit and credit both sides of their balance sheet. After all, the borrower needs to put the money somewhere. In the first instance he has a deposit with the lending bank. Of course, he may well then use the borrowed funds to buy something from someone else. In that case, the funds end up as a deposit at that or another bank. Note, no third party was involved in this increase in the money supply, only the bank and the borrower.

Come the next recession the West is going to have to resort to more helicopter money, and not just to banks:

All this is far from saying the next phase of helicopter money — handing out newly created cash to households directly — would be helpful. Dispatching more, and far noisier, helicopters would spell disaster if the public responded badly, which is likely. It would be the central banking equivalent of jumping the shark.

The world is suffering from a huge debt problem:

The world has dragged forward a huge amount of future buying power, and spent it.

Official recognition is dawning that Keynesian economics has landed us in deep do-do:

Have we created economies that require credit growth to rise more quickly than GDP growth to sustain employment and consumption? We appear to.

This would be unfortunate because mathematically, let alone economically, this requirement implies debt rises without limit as a share of national income. It would therefore be a wholly dysfunctional economic system that required debt to grow faster than nominal GDP.