Covid-19 showed that monetary policy incentive measures in most developed countries are virtually exhausted. However, this is not a new reality, but a situation that has been evolving since the inception of the global economic disaster of 2008. Perhaps, this is evidence that new means of stimulating the economy should come into play.
COVID-19: The Perfect Storm for the Global Economy
Recently, many experts have expressed ideas that COVID-19 will fundamentally change our world; in particular, it will significantly influence the financial state of various countries. But even before the pandemic, there were already certain challenges in the global economy - it has been in stagnation and a growing recession for almost two years now. Restrictions on international trade, customs protectionism, and the crisis with oil prices all contributed to the emergence of the situation in which we find ourselves now.
The current crisis has deep, systemic premises. It is inspired by a financial imbalance - distortions in the economic sector. Various derivative financial instruments are created only to overflow financing hollows. They infinitely increase the formal money supply, but the largest part of this mass is virtual. As a result, the formal money supply radically diverges from the physical.
That is why analysts predict a positive shift. Perhaps coronavirus is a kind of a call for the world to unite around one platform for free trade and accelerate globalization. The pandemic has proven that the Internet and networks are the main livelihoods of communities, countries, people, and businesses. Or, maybe Covid-19 and the consequences it brought testify that the global economy is ready for a paradigm shift.
Moreover, the reduction of the intervals between crises and, correspondingly, their increase in frequency could lead to unprecedented monetary policy measures such as a one-time payment of fixed amounts to all citizens to stimulate consumer demand. This opinion was expressed by the director of investment management of the Swiss bank Julius Baer Yves Bonzon in his forecast on long-term trends for 2020–2029.
Helicopter Money Era
Long before the pandemic, the monetary policy of the states reached its limits. Near-zero rates and QE created liquidity in the financial sector, which helped banks but not enterprises of the real economy of the economy and ordinary citizens. Ultimately, it turned out that the situation in the stock markets, which showed stable growth, did not at all reflect the true reality of the economy, in terms of industrial production.
The pumping of financial markets with liquidity has led to the fact that the 2020 global debt is three times higher than the global GDP. This means that the real economy of the whole world produces three times fewer goods than the money in the financial sector. This debt bubble was supposed to burst for a long time now and lead to a global crisis. The helicopter money can be an attempt to, at least, delay the inevitable.
So, within the next few years, or maybe months, central banks can switch to previously unthinkable measures - from giving money to banks to giving money to households. The era of helicopter money, which economists have foretold for a long time now, seems to have already begun. In attempts to stimulate the economy weakening from a pandemic, more and more states are ready to sponsor their citizens, if only they continue to consume.
The problem of developed countries is that they cannot stimulate inflation acceleration in order to revive the economy, as a result of which they are forced to resort to extreme measures. Negative rates in Japan and the EU have been observed for several years. Of course, now that the situation has been aggravated due to quarantine measures, radical actions like helicopter money may have to be applied. Will it have a positive effect? It is too soon to say. But the fact that governments around the world are thinking of implementing such a measure means that the economic laws have some room for perfection.
Unlike all variations of QE, the idea behind helicopter money is that it does not go to banks or markets, where they are often used to pump financial bubbles, but as a one-time help directly to families. It’s not an established fact that these human-centered money checks will help the economy, but it’s enough that they will greatly help millions of people.
The advantage of helicopter money is that the implementation of this approach does not require an increase in borrowing. This reduces the risks of inflation of bubbles, avoids excessive bloating of central bank balances, and increases the potential of the latter if the crisis again threatens the financial system.
Note: The idea to stimulate demand by distributing money directly to the population was proposed by economist Milton Friedman back in the 1960s. In the early 2000s, then head of the Fed, Ben Bernanke, remembered it, stating that “helicopter money could prove a valuable tool.”
Can UBI Get Us Through Coronavirus?
What happens if states start giving out money without any conditions? This concept, which sounds like the plot of a utopian novel, is known as Universal Basic Income (UBI) and is gaining popularity in the world amid threatening massive job cuts due to the coronavirus pandemic. A few months ago, any talk of UBI was nothing more than a contribution to a purely theoretical discussion of a futurological topic. There was not a single country in the world that would seriously consider introducing UBI at the national level. But the coronavirus pandemic seems to have dramatically accelerated the transfer of the UBI theme from the stage of limited experiments to the plane of large-scale practical solutions.
The discussion of UBI has intensified along with the global outbreak of coronavirus as it has hit economies hard in all countries. Of course, the global panic played its role, embracing the governments of the most developed countries, which did not expect such a dramatic situation from both a medical and economic point of view.
The essence of the UBI is quite simple: everyone who falls into the group of recipients of such income can rely on regular payments of a set amount of funds from the state without any additional conditions or the need to work. The themes of social policy during the current pandemic no longer just coincide in some ways with the elements of the UBI. But, most importantly, their implementation creates a very good basis for the post-coronavirus discussion about emerging changes.
It is not necessary to reduce the goal of introducing the UBI to purely labor issues. In fact, it is a deeply humanitarian institution, which aims to improve not only the standard of living but also the quality of life of people. And here an important role is played by how a person with the help of the UBI can better engage in the self-realization of his personality and achieve success not only in the labor market but also in public and personal life.
But in its pure form - as a constant unconditional cash payment to the entire population - the idea of the UBI, apparently, is not that easy to realize. It must be done step by step, choosing, based on a thorough analysis, the most prepared public institutions to implement the policy. The coronavirus pandemic clearly suggests that it is time to implement UBI through universal free access to health care, education, and social assistance.
It is already obvious that current health systems in most countries need a massive infusion of funds. It is almost impossible to reach this at the expense of the population due to the expected long consequences of the inevitable economic recession of 2020 and, most likely, 2021. Also, it seems impossible to hope for additional funds through mandatory insurance systems. This was understandable even before the coronavirus pandemic, if only because of fundamental demographic shifts in developed countries, and primarily in connection with the aging of the population. The number of employees, who are the main payers of insurance premiums, is gradually decreasing, and, on the contrary, the number of elderly unemployed people - the main consumers of health services - is growing.
Therefore, the future of health systems, at least in developed countries, is transitioning to predominantly budget models that are funded by general taxes and that provide equal access to health care for all groups of the population, regardless of their material and social status. Such a shift will certainly be a step toward the implementation of the UBI philosophy.
The current trials that have fallen to school education also indicate the need for shifts in its organization. Despite the fact that in developed countries almost all children go to school and parents have the opportunity not to pay for it, the forced transition to distance learning has revealed a very significant problem of access to modern teaching aids. In low-income families, as it turned out, children often do not have computers and other similar gadgets necessary for training, and the Internet is unstable. Within the framework of the UBI philosophy, apparently, it is necessary to discuss the question of targeting free provision of such families with a standard set of equipment for distance learning, which even before the coronavirus pandemic was gradually supplanted by offline learning. This step is all the more overdue in connection with the mentioned shifts in the labor market, which require the functioning of an accessible system of continuing education.
And finally, one cannot fail to say about social assistance. Now it is provided at the expense of many sources: the state budget, volunteering, NPO funds, business. The demographic situation increases the load on this industry, and the coronavirus pandemic has shown that there are more potential recipients of social assistance than it had originally appeared. And if a country considers itself to be “social,” as enshrined in the constitutions of a number of countries, then another step is evident in the implementation of the UBI philosophy: providing all needy people with foster care with a predominant contribution of budget sources.
Smart Contracts and UBI (Ian Thoughts)
One way to implement UBI would be to select a finite number of businesses and consumers and introduce UBI, which would yield from the added economic value created as a result of its implementation. In essence, the UBI should appear in the system as quasi-money (for example, discount vouchers). Businesses would agree to accept them as a partial means of payment.
The more economic transactions it participates in, thereby stimulating an increase in the spending and velocity of money, the more real money it accumulates in itself (fixating the fraction of the increased velocity of money in the ecosystem).
Blockchain technology and Smart contracts that operate on it enable the development of truly creative cases of programmable money that make possible what was previously impossible. It is only necessary to find a theoretical justification, a model that can be easily implemented in any virtual economic community, which can then be tested and scaled.