As I’ve been saying for a while, humanity could rid itself of the pesky zero bound problem by eliminating physical currency and creating a situation where nominal interest rates can go negative. Demographic shifts and population aging may someday (like “next few decades” not “later this summer”) soon force us to choose between this option and the world economy falling into a basically permanent recession. Now it looks like Citi’s chief economist Willem Buiter is on board. And in the shorter term, he wants much more aggressive central bank action, saying the Fed the ECB the Bank of England and the Bank of Japan should be:
– Reducing rates, first by lowering them all the way to zero (UK and euro area),then by eliminating the effective lower bound on nominal interest rates (all four currency areas)
– Carrying out more imaginative forms of quantitative easing (QE) and credit easing (CE), in all four currency areas, by focusing on outright purchases of and/or loans secured against less liquid and higher credit risk securities, subject to a sovereign guarantee (joint and several in the euro area) for all such risky central bank exposures
– Engaging in helicopter money drops (all four currency areas): a combined fiscal- monetary stimulus
Of these “helicopter drops” or “combined fiscal-monetary stimulus” is my favorite. The idea is to print money and give it to people. The exact statutory situation differs from place to place, but you could achieve this in a few different ways. One would be for the legislature to enact a law saying “everyone gets $500” and then have the central bank buy $500 per person worth of bonds and light the bonds on fire. Another would be for the central bank to say it’s now engaging in asset purchases whereby anyone who wants to sell a sock can get $500 from the bank for it. Or you could offer loans secured by socks. The point is that debtors would pay off debts, spenders would buy stuff, savers would save, but everyone’s expectations of nominal spending and income levels would rise.