The ‘Foreign Affaird’ publication of the influential and policy-setting Council of Foreign Relations made an announcement that could have huge ramifications for monetary policy going forward. In an article titled ‘Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People,’ the authors argue that the current quantitative easing and debt monetization is not generating broad-based stimulus to the economy.
To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.
Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.
This is a huge announcement because it would lead to a major increase in the velocity of money. While a tremendous amount of money was created following the financing crisis, it has yet to result in significant inflation as a good amount of it remains parked in excess reserves and in corporate accounts. This has brought the velocity of money to the lowest levels in decades.
This post was published at GoldStockBull on August 27th, 2014.