Financial system: helicopter money as a precursor to open monetization

The Corona crisis is generating its own momentum, not only in financial markets but also in politics. Since it became clear that the impact of the Corona crash could dwarf that of the great financial crisis, governments and central banks have also recognised the seriousness of the situation. Huge rescue packages and support programs are being announced around the world to limit the economic damage. "After Hong Kong, the US is now the first major country to distribute money 'by helicopter'. This could be the prelude to much bigger actions," explains Dr. Heinz-Werner Rapp, founder and director of the FERI Cognitive Finance Institute.

USA drops helicopter money

The US government had announced these days that it would hand out a cheque for one thousand dollars to every needy US citizen against the consequences of the Corona crisis. However, this is not real helicopter money, since the measure is financed (at least superficially) from the treasury and not from the central bank. Real helicopter money follows a different logic: here, the central bank would print new money and 'dump' it directly on the population, i.e. bypassing the banking system or the securities markets. This difference is significant, says Rapp: "The US approach directly increases government debt. This makes bond markets nervous; in the midst of the Corona crisis, that's why US interest rates have been rising recently."

Is OMF ("Overt Monetary Finance") coming soon instead of helicopter money?

In practice, however, "real" helicopter money is rarely seen anyway. Instead, other methods are being discussed that are essentially very similar: "The Corona crisis has now provided a concrete trigger," explains Rapp. The financial dimension of this crisis is likely to reach a level that will overstretch the fiscal sustainability of individual countries. This applies in particular to Italy, with its unprecedented economic and social collapse. "In the medium term, a new edition of the euro crisis threatens from there, which could hardly be absorbed by the ECB either, at least no longer with the previous means," Rapp warns. This would pave the way for "open monetary financing" (OMF), i.e. a massive monetization of government spending by central banks. "Going into OMF would once again greatly accelerate the current trend of monetary dilution and set in motion justified fears of inflation," Rapp's analysis concludes.