Europe is on the verge of a new recession and deflation. Money should be printed and injected into the bloodstream of the economy. The question is what mechanism should be employed in doing so. Recently, the ECB has been trying its TLTRO program: it is willing to lend newly printed money to banks at low rates provided that they lend it on to the real economy. All that is very similar to the Hungarian central bank’s Funding for Growth Scheme. However, banks across Europe are in a rather bad shape and are not keen on undertaking too much additional credit risk, while in the current economic environment, credit is not in high demand with businesses either.
Where money is actually lent, it is lent to companies that are judged to be creditworthy according to a rigid system of internal bank regulations—in fact those capable of offering adequate assets as collateral. They are by no means the most competitive.
What is more, in its panic terror of deflation, the ECB has most recently embarked on asset purchases, following the US central bank. The Fed is a less inert institution, and it has long employed this method of printing fresh money. The US is currently tapering QE3 (the Fed’s Quantitative Easing operation), as part of which massive amounts of government bonds and mortgage-backed securities have been purchased using the newly printed dollars.
However, as I have discussed it previously, most of the fresh money was channelled to the rich, who saved it rather than spending it on consumption. As a result, hardly any of it found its way to the bloodstream of the economy. In principle, it would be possible for banks to lend out the money of the rich to be used for consumption, but this is not happening. Everyone is indebted and there is no one to lend to. Instead, banks allocate new savings to reserves, which are ultimately returned to the Fed in the form of deposits. Although the program most certainly contributed to the stabilisation of the economy, astounding amounts of money had to be printed in the process. I would not be surprised if it turned out that QE has actually paved the way for the next major economic turmoil, manifested in soaring inflation.
The Fed would be much more efficient and it could achieve its target by printing much less money if it made its purchases of enormous value in the market of real goods rather than on capital markets. That is, by purchasing goods rather than bonds. In good measure, the central bank will go to the baker’s to fetch its donuts, to the pub for the regular pint, and to the hairdresser’s to get its hair trimmed, and will use newly printed money to pay for all that. That would be real economic stimulus and job creation, and we could say goodbye to deflation.
The idea of course is absolutely absurd—the Fed does not have the capacity, and there is nothing it could do with all the stuff, no matter how better it sounds to buy goods than bonds. Fortunately, I know folks who can carry out the task to perfection. The population has the time and the capacity, and the goods purchased would not be wasted either. They should be given the money, allocated fairly and equally. As everyone would get their share unconditionally, it would be technically similar to basic income, except that it would be financed from newly printed money. That is why it may be called monetary basic income. Since the vast majority of people are not rich, they would spend the dough rather than saving it, and take care of economic stimulus in the process. Given the crisis, they could do with a little extra support, and most of the printed money would be put to good use in the first round. By definition, they would buy from competitive businesses, those that deserve success the most. Based on the 85 billion dollars worth of monthly asset purchases of QE3, every American would get a monetary basic income of about 260 dollars in the period of money printing. In reality, the distribution of a far smaller amount would be sufficient, as the scheme would boost the economy much more efficiently than QE3.
Where appropriate, the monetary stimulus could be absorbed through the budget once the economy has recovered. That is, rather than spending it all, the government would return some of its soaring tax revenues to the central bank for destruction.
The suggestion of a direct financial gift will probably arouse resentment among many people—that is just not how things are done. However, asset purchases and providing banks with cheap funds also constitute giving away money on a massive scale, only in a covert form. It is only much less transparent who benefits, and to what extent. In both cases, some money does trickle down to the population, as the measures give a degree of stimulus to the economy. Nevertheless, the first-round (i.e. main) beneficiaries are the rich in the case of asset purchases and creditworthy (i.e. rich) corporations in the case of TLTRO. In other words, central banks are giving away money even now, mostly to the benefit of a small group of recipients. For the majority, the support provided by the measures are inefficient, fragmentary and indirect. And that is the problem.
Original date of Hungarian publication: 11 November 2014