Here is my answer on Quora:
This would simply be equivalent to a tax cut. At the end of the day, every adult American would find $1,000 more in her pocket.
If the Fed does it directly, this would not be counted as government “debt”.
Some people call this “helicopter money”. It is a form of fiscal policy in disguise.
A tax cut would be a good idea today in the U.S.
Also, here is Joerg Bibow’s letter to the Financial Times on helicopter money.
As long as the Euro area enforces balanced budget constraints at ALL levels of government, the Euro area will not be sustainable.
I have summarized here the argument behind the statement above.
What follows is a simple model that shows the logic of the argument.
1. In a monetary economy where the private sector demands financial assets as a vehicle to store wealth (aka ‘financial savings’), spending (by the private sector) can be assumed to depend on saving desires. Specifically, in any given period of reference, the change in total spending (ΔE) is a function (α) of the difference between the available stock of financial assets (FA) and the desired stock of financial savings (FAd):
The intuition is that if the value of available financial assets exceeds the desired stock, spending will increase, and vice versa.
In a forthcoming article (‘A T-shirt model of savings, debt, and private spending: lessons for the euro area’, European Journal of Economics and Economic Policies: Intervention, Vol. 13 No. 1, 2016, pp. 39–56), I have discussed the relevance of the savings-debt constraint in macroeconomics, and have argued that EU policies violate the savings–debt constraint. As long as this continues, the euro area will continue to live dangerously and will remain vulnerable to political disintegration.
The EU has always stressed that euro area’s national government budget must be consistent with the budget constraint set by fiscal rules, while offering no other channel for fiscal flexibility at the euro area level. This approach is inconsistent with a key constraint in macroeconomics that I call the savings-debt constraint.
In a nutshell, the savings-debt constraint says that any policy that inhibits debt also inhibits financial savings, spending, and jobs. Evidence that the EU policy framework is inconsistent with the savings-debt constraint is offered by the first priority in the list offered online by Jean-Claude Juncker, President of the European Commission: ‘Creating jobs and boosting growth – without creating new debt.’ As long as EU policymakers believe or assert this principle, the euro is in unsafe political hands.
Commenting on the last Japanese move, Lisa Abramowicz (The Negative Side of Negative Rates) rightly argues that the only positive effect on spending that one can expect from negative rates is through a depreciation of the yen (at least, as long as it lasts). She writes that negative rates is an idea that “sounds good in theory”, but she clearly acknowledges that the effect on bank lending is likely to be dampening, not stimulative. That negative rates do not have an expansionary, and have probably a deflationary effect has been maintained by some economists, including this blog here and here and also the Q&A here. It should be clear by now to an increasingly number of people that what we call a negative interest rate (on banks’ excess reserves) is actually a positive tax rate!
I suspect that those who believe that negative rates stimulate lending have a view of central bank interest rates that does not fit the reality of a monetary system. They seem to think there is a symmetry between positive and negative rates. They seem to think that because lower interest rates mean lower cost of borrowing, an interest that gets so low to turn negative is an even more powerful borrowing (and spending) stimulus. Equivalently, at negative rates lenders will get encouraged to lend less (and spend) more.
Stimulus?
In the midst of the Eurozone “sovereign debt” crisis and increasing spreads in 2010-11, interbank lending came to a halt. At the same time, bank clients were moving funds from the banks of the countries “in trouble” to the banks based in “safe countries”. Because “core” banks were not willing to lend liquidity back to them, “periphery” banks borrowed from the Eurosystem to settle their payments, and Target2 balances diverged. This ended with Draghi’s “whatever it takes” announcement in the Summer of 2012 and the introduction of OMT in the ECB’s toolbox.
What is happening today (SEE CHART) is very different, and does not reflect a “flight to safety” as it did back then. Today’s divergence is a consequence of the ECB asset purchase program (QE), as well as of the current levels of policy interest rates set by the ECB.
