Citigroup on Wednesday issued a client note that just a few weeks ago would have read like satire. “We think central banks in the U.S., euro area, Japan, and the U.K. could and should do much more” to stimulate growth, said the firm’s economists, led by Willem Buiter. Yes, these institutions, which have already pushed their respective interest rates to historic lows and made unprecedented efforts to buy government bonds and other securities, are not being aggressive enough, the firm argues.
Specifically, Citi advocates a three-pronged approach: First, lower interest rates “all the way to zero” in the two regions, the U.K. and euro area, where they aren’t basically at zero already. Second, carry out “more imaginative forms” of quantitative easing of any or all types of “less liquid and higher credit risk securities” beyond government bonds. And third, engage in “helicopter money drops,” by which they mean the fiscal authorities in each region should join forces with the central bank to pump money directly into their respective economies.
...................a series of “try anything” schemes that policy makers could adopt: “abolishing currency completely and moving to E-money on which negative interest rates can be paid as easily as zero or positive rates,” for one. Taxing holdings of bank notes (originally a Depression-era suggestion), for another.Still, the firm insists the benefits of further drastic action outweigh the costs.
Citi cautions that “quantitative easing,” or central bank asset-buying programs, likely have diminishing effects over time, such that “even doubling or tripling the size would not multiply the effects.” It says the U.S. and U.K. should stop buying government bonds as they have been and, taking a cue from Europe, start buying assets that are less liquid “and/or high credit risk.” (One can hardly blame policy makers for fearing those consequences.) To be sure, Citi’s economists say they doubt policy makers will pursue anything remotely this aggressive.
If there is an area where everyone can agree, however, it may be on taxation. Citi says the “helicopter money drop” they advocate can take the form of infrastructure investment, direct government payments to households, or a “temporary tax cut” (emphasis theirs), any of which would be funded by a “permanent increase in the monetary base.” It should be immediately clear which of these options, at least in the U.S., would be most likely. (A tax cut funded by an increase in the money supply, which is a demand-side stimulus program, by the way, should not be confused with a tax cut that shrinks the size of government, even though it would likely be phrased as such to win over the public.)