‘Helicopter money’ on the horizon, says Ray Dalio
Robin Wigglesworth, US markets editor
©Bloomberg
Bridgewater’s
Ray Dalio has argued that central banks’ ability to invigorate economic growth has atrophied, and predicts a new era of radical monetary policy possibly involving “helicopter money”.
Central banks around the world have been attempting to revive durable economic growth and combat deflationary forces through conventional measures like interest rate cuts and unconventional policies such as quantitative easing — or bond buying — and even negative interest rates.
But Mr Dalio, by one measure the
most successful hedge fund manager of all time, argued in a note to clients that these measures have been exhausted and are increasingly ineffective.
“While QE will push asset prices somewhat higher, investors/savers will still want to save, lenders will still be cautious lenders, and cautious borrowers will remain cautious, so we will still have ‘pushing on a string’,” he wrote.
He therefore predicts that central banks will eventually have to usher in what he calls “monetary policy 3” — where rate cuts were the first stage and
quantitative easing the second phase — which will more directly and forcefully encourage spending.
The Bridgewater founder says this third era of monetary policy will range from central banks directly financing government spending through electronic money-printing to what the famous economist Milton Friedman coined “helicopter money” in 1969, in other words central banks disbursing cash directly to households.
“To be clear, we are not describing what will happen tomorrow or what we are recommending, and we aren’t sure about what will happen over the near term,” Mr Dalio wrote.
“We are just describing a) how we believe the economic machine works, b) roughly where we believe that leaves us, and c) what these circumstances will probably drive policymakers to do — most importantly that central bankers need to put their thinking caps on.”
Radical solutions like helicopter money have been periodically discussed by economists but dismissed by policymakers, but there is a growing conviction among money managers and economists that with the ability of central banks to buttress economic growth at the very least now limited, more focus should be shifted over to fiscal policy.
While QE will push asset prices somewhat higher, investors/savers will still want to save, lenders will still be cautious lenders, and cautious borrowers will remain cautious, so we will still have ‘pushing on a string’
- Ray Dalio
“The current market turmoil and the concomitant tightening in financial conditions becomes much more alarming if we think that monetary policy and quantitative easing are no longer effective,” Willem Buiter, Citi’s chief economist, said in a report this week. However, Mr Buiter was sceptical that governments have the will or ability to act more forcefully.
“That puts the ball back in the fiscal policy court, but it is increasingly doubtful that many policymakers have the political capital or the will to pull the fiscal levers. And even where they do, it is not certain that the markets will tolerate anything other than a carefully thought out and well-executed set of structural reforms.”
He added: “However, these take time, and time is running out. The policy of borrowing from future earnings to pay off today’s debts has been seen too many times and investors’ patience appears to be running out.”
The Trade Union Advisory Committee to the Organisation for Economic Co-Operation and Development, a club of developed countries, also urged more forceful government action to strengthen economic growth.
“A collective and comprehensive policy response by OECD and G20 governments is essential to avoid economies slipping further into crisis,” John Evans, General Secretary of the TUAC said in a statement on Thursday. “This requires lifting aggregate demand though increased public investment and higher wage levels, so as to generate employment and long-term investment. Current policies are not working.”
