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How many Fixed Income trading venues are there?  [155]  A simple question came up recently in a conversation – how many new Fixed Income t...

Thursday, 16 April 2020

Policy frameworks for pandemics - part 5 - restarting the economy...

Once the virus is contained, how do we restart the economy?

One proposal is helicopter money - print money and distribute it, so people start spending and get the economy rolling again.

But, this is counteracted by the paradox of thrift, where people will individually consider saving this extra money is a good idea.  At the aggregate level this does not increase economic activity in the manner proposed.

Consider Pacman, the pretty ancient arcade game - here's a link to a version you can play in a browser https://www.webretrogames.com/pacman-html5.php . In the game Pacman has the option to swallow a pill that allows him to, for a limited time only, turn on his pursuers and eat them.

Relevance?

Combine helicopter money distribution with a bank account that has a variable negative interest rate on a variable periodicity for different bands.

AmountRatePeriodicity
0 to 10005%Annual
1000 to 2000-5%56 days
2000 to 3000-10%28 days
3000 to 4000-15%14 days
4000 to 5000-20%14 days
Above 5000-25%14 days

Why? Simple, this nudges any rational recipient of the money to spend it such that they have a balance less than 1000 in their account and therefore earn credit interest.  Rather than the punitive negative interest rates for greater balances.

One can consider this a case of "Use it or lose it".

Milton Friedman + Pacman.
 

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