The type of stimulus that used to be taboo—one in which central banks take a more junior role and collaborate with governments—is gaining appeal. This according to an article in Bloomberg.
While such a shift could pose a risk to the “independence from politics that monetary policy makers prize,” the article says, the threat of deflation is leading to an emerging consensus that “the next downturn may need to be fought with direct and permanent injections of cash—often called ‘helicopter money’—and that central banks can’t deliver it alone.”
The article cites comments from former U.S. Treasury secretary and current Harvard University professor Larry Summers: “We’ve got to think much harder, for economic stabilization, about mechanisms that involve spurring demand directly.” While governments can channel spending directly into the economy and boost consumer spending power by cutting taxes, the article says, this can often be a slow process because of the need for approval from lawmakers. “Central banks can act faster,” it says.
The article cites comments from Bridgewater’s Ray Dalio, who says: “When you have the next downturn, QE isn’t going to be as effective, interest rates aren’t going to be effective. Then you need fiscal policies and debt monetization. We’re going to enter a new realm.”
According to PIMCO global economic adviser Joachim Fels: “Central bank independence increasingly looks like a brief historical episode that peaked around the turn of the century. Like it or not, get used to the new normal of dependent central banks.”