Europe and the rest of the world is facing a secular stagnation – a long period of low or even zero growth of national income. How to decrease the unemployment and save the people from the grasp of poverty? What about throwing money out of the helicopter? Surprisingly, economists are considering this idea. Quantitative easing (QE) can be employed by central banks to counter the secular stagnation roughly in three ways. Two of them are illustrated in the comic.
Riše: Timi Gonza
Vsebinsko uredil: Tej Gonza
Riše: Timi Gonza
Vsebinsko uredil: Tej Gonza
Europe and the rest of the world is facing a secular stagnation – a long period of low or even zero growth of national income. How to decrease the unemployment and save the people from the grasp of poverty? What about throwing money out of the helicopter? Surprisingly, economists are considering this idea. Quantitative easing (QE) can be employed by central banks to counter the secular stagnation roughly in three ways. Two of them are illustrated in the comic.
The first instrument of QE is to lower the interest rate of the central bank. This is done in order for the business banks to borrow and lend more money. Despite the interest rate of European Central Bank currently being below zero, making it expensive not to borrow money, banks are not giving the money away.
The second is buying government bonds, which provides government the money to somehow distribute among the people by different means. Critics claim that because people will expect future increase in taxes in order for the government to buy the bonds back from the central bank, there will be no increase in consumption.
The third, and rather a nonconventional, instrument is to give money directly to households in order to boost private spending. The idea can be traced back to John M. Keynes, who proposed to burry bank notes and hire the contractors later to dig them back up. In the lines with Keynes’ idea, Milton Friedman employed a metaphor of throwing money from the helicopter, thence the expression – the helicopter money.
After money is printed out of the helicopter, the left side of the comic represents people receiving money, but not really giving it a second thought avout whether the QE is reversible, which would imply that sooner or later, money has to be returned. The right side of the story represents the predictions of rational expectation theory. People (rationally) expect that the money they got a grip on will eventually be demanded back by the issuer - there is no free lunch. That is why they hold onto it instead of spending it, which is the main difference between the left side and the right side. Paradoxically (or not?), the irrationality saves the day!
In the real life, outside the ECON(C)OMICS, things get complicated, naturally. Printing the money out of a helicopter does not seem to be the best idea, if not for else, there are negative externalities to burning the fuel with the heli ride.
* Narisal Timi, napisal Tej. Oba s priimkom Gonza
Interested about the topic? See the series of lectures we organize titled Money in the 21st century: http://gibanjezaekonomskopluralnost.weebly.com/napovednik.html
.
The first instrument of QE is to lower the interest rate of the central bank. This is done in order for the business banks to borrow and lend more money. Despite the interest rate of European Central Bank currently being below zero, making it expensive not to borrow money, banks are not giving the money away.
The second is buying government bonds, which provides government the money to somehow distribute among the people by different means. Critics claim that because people will expect future increase in taxes in order for the government to buy the bonds back from the central bank, there will be no increase in consumption.
The third, and rather a nonconventional, instrument is to give money directly to households in order to boost private spending. The idea can be traced back to John M. Keynes, who proposed to burry bank notes and hire the contractors later to dig them back up. In the lines with Keynes’ idea, Milton Friedman employed a metaphor of throwing money from the helicopter, thence the expression – the helicopter money.
After money is printed out of the helicopter, the left side of the comic represents people receiving money, but not really giving it a second thought avout whether the QE is reversible, which would imply that sooner or later, money has to be returned. The right side of the story represents the predictions of rational expectation theory. People (rationally) expect that the money they got a grip on will eventually be demanded back by the issuer - there is no free lunch. That is why they hold onto it instead of spending it, which is the main difference between the left side and the right side. Paradoxically (or not?), the irrationality saves the day!
In the real life, outside the ECON(C)OMICS, things get complicated, naturally. Printing the money out of a helicopter does not seem to be the best idea, if not for else, there are negative externalities to burning the fuel with the heli ride.
* Narisal Timi, napisal Tej. Oba s priimkom Gonza
Interested about the topic? See the series of lectures we organize titled Money in the 21st century: http://gibanjezaekonomskopluralnost.weebly.com/napovednik.html
.