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Frances Coppola on the Macroeconomics of Helicopter Drops (Macro Musings, 60 mins) Frances Coppola, former banker and financial author discusses her new book, The Case for People’s Quantitative Easing. It’s an in depth analysis of Quantitative Easing as a stimulus method and reason it hasn’t worked well. Coppola claims that QE stimulus is essentially indiscriminate and Central Banks are gifting net financial assets into the hands of the private sector. That sector in turn tends to save in a crisis and hang onto the cash. QE, Coppola argues, must be designed to be spread thinner in order to have any impact on aggregate demand.
Coppola then stresses the need for QE to be permanent and convince the private sector that the cash won’t eventually be clawed back. Simultaneously, though, this kind of stimulus zaps safe assets out of circulation. Towards the end, she discusses ways for governments to directly finance their own investments, which is illegal in most places but, she suggests, there are ways around it by using state investment banks.
Why does this matter? Last week, the US Fed announced a QE-like operation in which they will purchase around $60 bn of Treasury bills a month in response to sharp spikes in interest rates in overnight markets. Soon after, in a separate action, the New York Fed injected $104.15 bn into financial markets to boost liquidity. Equally, the ECB has reversed its plan to end asset purchases and Bank of Japan continues to be the virtual sole purchaser of government debt and a major buyer of corporate shares. It’s essential to analyse whether this would work to revive a slowing Western World or whether such ‘unconventional monetary policies’ and the ongoing economic stagnation now operate in a vicious circle.