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The Helicopters Are Coming

With the economic situation in many advanced economies rapidly deteriorating, policymakers are rolling out unprecedented stimulus programs, setting the stage for what amounts to a massive experiment with hitherto unorthodox Modern Monetary Theory. Today's extraordinary problems, it would seem, require extraordinary solutions.

NEW YORK – With the COVID-19 pandemic intensifying, the United States has just adopted a $2 trillion economic-rescue package (equal to 9.2% of 2019 GDP). The legislation follows unprecedented actions by the US Federal Reserve, which will engage in open-ended quantitative easing, and has introduced new mechanisms to backstop businesses and keep credit flowing.

Much of the US response will come in the form of “helicopter money,” an application of Modern Monetary Theory (MMT) in which the central bank finances fiscal stimulus by purchasing government debt issued to finance tax cuts or public spending increases. The US economy is deteriorating at a spectacular rate, partly because of the direct health impact of the COVID-19 pandemic, but mostly as a result of social-distancing mandates that are preventing people from producing and consuming.

Given the circumstances, it is safe to assume that the Fed’s incremental asset-purchase program will reach at least $2 trillion if that is what it takes to spare the federal government from having to access asset markets directly to fund its new initiatives. In January, before the coronavirus had become a recognized threat, the Congressional Budget Office predicted that the US government would have an annual recurring federal deficit above $1 trillion for at least the next decade.

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