Making ends meet
Prudent and deliberate use of the policies of quantitative easing and helicopter money can go a long way in countering the oncoming COVID-19 inflicted recession in India
Ever since the Chief Minister of Telangana, K Chandrashekhar Rao, made mention of quantitative easing (QE) and helicopter money, the terms have become so popular that even the illiterate and complete novices started using them. The CM categorically said that "In this critical time, we should think of a solution and QE is the only way the country will be out of this crisis" and added that since the money comes as an aid from the sky, it is called helicopter money. This money is generally used by central reserve banks to revive the economies of countries in large economic crises.
KCR addressed a letter to PM Modi soon after the cabinet meeting held on that day. In the letter, he mentioned that: "All over the world, central banks have taken very bold measures to counter the global recession which is worse than the great repression of 1929 and global financial crisis of 2008. Distressed times need desperate measures. The only way to counter the impending recession is through quantitative easing (QE) and the effective use of helicopter money. This approach is being followed by all major central banks of the world namely, Federal Reserve of USA, European Central Bank, Bank of England, Bank of Japan, People's Bank of China, Central Bank of Russia, Bank of Canada and Reserve Bank of Australia. The quantitative easing thus proposed should be at least 5 per cent of the GDP of the country. The 2019-20 GDP of India is Rs 203.85 lakh crore and the QE at 5 per cent works out to be Rs 10.15 lakh crore".
QE, also known as large-scale asset purchases, is a monetary policy whereby a country's central bank, like the Reserve Bank of India, buys predetermined amounts of government bonds or other financial assets in order to add money directly into the economy. Once the period of QE ends, these capital flows may reverse, leaving behind a stock of unpayable debts.
Quantitative easing can fuel economic growth since money funnelled into the economy should allow people to more comfortably make purchases. This can have a trickledown effect on both the consumer and business communities, leading to increased stock market performance and GDP growth. The problem is that the money created through QE is used to buy government bonds from the financial markets. The newly created money, therefore, may go directly into the financial markets, boosting bond and stock markets nearly to their highest level in history.
The end of QE may be deflationary. The goal of QE policies is to boost economic activity by providing liquidity to the financial system. But quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated and too much money is created by the purchase of liquid assets. On the other hand, QE can fail to spur demand if banks remain reluctant to lend money to businesses and households.
If central banks increase the money supply, it can cause inflation. In the worst-case scenario, the central bank may cause inflation through QE without economic growth, causing a period of so-called stagflation. Quantitative easing has been nicknamed 'printing money' by some members of the media, central bankers and financial analysts. With QE, the newly created money is usually used to buy financial assets other than government bonds.
According to the US Economy Expert, Kimberly Amadeo, the President of World Money Watch, Japan was the first to use QE from 2001 to 2006. It restarted in 2012 with the election of Shinzo Abe as Prime Minister. The US Federal Reserve undertook a successful QE effort in 2008. It added almost $2 trillion to the money supply.
Quantitative easing also stimulates the economy in another way. Past experiences proved that QE achieved some of its goals, missed others completely and created several asset bubbles. It helped to stabilise the economy, providing the funds and the confidence to pull out of recession. It keeps the interest rates low enough to revive the housing market.
It stimulated economic growth, although probably not as much as expected. It didn't achieve the goal of making more credit available. It gave money to banks but the banks sat on the funds instead of lending them out. Banks used the funds to triple their stock prices through dividends and stock buybacks. As feared, QE didn't cause widespread inflation. If banks had lent out the money, businesses would have increased operations and hired more workers.
Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero. It is also referred to as a helicopter drop, in reference to a helicopter dropping supplies from the sky. This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
Quantitative easing also involves the use of printed money by central banks to buy government bonds. But not everyone views the money used in QE as helicopter money. It's not the same as bond-buying by central banks 'in which bank-owned assets are swapped for new central bank reserves.'
According to Arvind Subramanian, former Economic Advisor to the PM, quantitative easing has generally, and on balance, had a positive impact on emerging markets (EMs) and the global economy. But in some instances, they have added to pressures and volatility for EMs, complicating macro-economic management and the impact has depended significantly on the global macroeconomic situation as well as the situation in particular countries. Arvind Subramanian once testified before the US House Committee on Monetary Policy and Trade and shared his thoughts on the international impacts of the Federal Reserve's quantitative easing program.
In an economy like the present Indian scenario and the possible impending crisis, it enables the flow of adequate money into circulation. It ensures brisk economic activity, increases purchasing power, facilitates reserve of enough money with the government and enhancement of borrowing capacity as well as spending power. The disadvantage is, in consonance with the money in circulation, if the production is not increased, not only does the purchasing capacity fall down but this also leads to inflation.
Against this background, despite a few disadvantages, the Telangana CM's suggestion to use quantitative easing (QE) and helicopter money to counter the impending recession is a sound one.
The author is Chief Public Relations Officer to Chief Minister of Telangana. Views expressed are strictly personal