Observations: 19 June 2021

Europe:

A prominent French think-tank proposes that the ECB implement “helicopter money” (i.e. direct cash transfers to households) as a more effective way to raise nominal income and spending than quantitative easing, but is promptly rebuffed by the ECB. French ECB official highlights a practical constraint to normalizing monetary policy.

“A monetary transfer [to households] equivalent to 1% of GDP would increase the inflation rate by 0.5 percentage point over a one-year horizon…Adding this instrument to monetary policy would limit the continuous increase of asset purchase programmes with their potential collateral effects…on inequality and asset prices” - Conseil d'analyse économique report

“We are not there to please this camp or that camp, but to guarantee the value of the currency. If we didn’t do that, just look at Argentina or Lebanon where economic confidence is no longer possible” – Francois Villeroy de Galhau, ECB Governing Council Member to Figaro.

What does it mean?

Villeroy de Galhau seems to have let slip further evidence of the “third mandate” of the ECB which has been in place since Draghi’s “Whatever it takes” speech: to preserve market confidence in the debts of Eurozone members.

If that mandate were to shift from lowering borrowing costs of EU sovereigns and toward more effective ways to raise inflation, the playbook should be an overweight in metals & mining, energy and semiconductors (among others).