PIMCO’s Andrew Bosomworth discussed how monetary policy is divided into three phases: conventional, unconventional and monetisation.
- Conventional: policy rate changes, liquidity provision, reserve requirements
- Unconventional: negative interest rates, large-scale asset purchases
- Monetisation: full subordination to fiscal policy, helicopter money
Obviously, currently the ECB is in the unconventional phase and the U.S. Fed is trying to get back to the Conventional phase.
While unconventional methods appear to be ‘pushing on a string’ to create the right amount of inflation for a ‘beautiful deleveraging’, Bosomworth warns against monetisation, or ‘helicopter money.’
“Monetisation is not something investors should wish for. We are unaware of any country that did “just a little bit” of monetisation without creating “a lot” of inflation; it’s hard to put the inflation genie back in the monetisation bottle.”
In past episodes of monetary authority produced hyperinflation the turning points from price stability to hyperinflation was often short and nonlinear.
From 1795 in France to 2007 in Zimbabwe, financial history has witnessed 56 episodes where budget deficits financed by the monetary authority produced hyperinflation. The turning point from price stability to hyperinflation was often short and nonlinear (see Figure 4), suggesting once started, it’s very hard to stop. For example, Germany’s consumer price inflation averaged 1.9% from 1900 to 1914 before jumping to 169% on average between 1915 and 1922.