The Euro area banking system produces every year 500 billion euros of money in the form of debt. This high production is geared at stabilizing the level of prices, using debt as a tool to control inflation. However, it fails to reach the targeted inflation level and yields significant unwanted collateral effects. Rather than producing money under the form of debt, it would be more effective to create it as central bank currency and distribute it to European residents. This form of money creation, which the ECB has already declared as part of its tools, would enable the central bank to fulfill its inflation-stabilization task much better. It would make the economic system more robust and the banks more resilient to crises. It would encourage governments to balance their budgets. European citizens would receive on average variable monthly amount, currently estimated between 40 and 120 € per person, including children. This amount would vary from one country to another, depending on local economic conditions.Rapport dividende monétaire en anglais

Progress is driving down prices. It is obvious for tech products, but this has been happening for almost all goods and services for several centuries. Jean Fourastié has shown that the price of wheat has been divided by 400 since the early 18th century. Back then, it was necessary to work more than 6 hours to buy a kilogram of wheat; today it takes less than a minute. If we travelled back in time to 1910 and paid with our current euros, a piece of bread of 250 grams would cost us € 4, a kilogram of beef € 92 and a bicycle more than € 5,000. Only a man’s haircut, at 13 €, would still seem cheap: its technology is the same than 100 years ago, so its price has not changed.

However, daily observation of prices show that they go up. This phenomenon, inflation, did not always exist. Thomas Piketty calls it « an invention of the twentieth century ». Inflation is driven by the fact that we create massive amounts of money each year. This pushes prices up, especially those of assets and real estate. The more money, the higher the price.

This money is created by the banking system, in the form of loans. In the euro area, 500 billion euros are created each year. This is a considerable amount, far greater than the wealth created by growth, 200 billion euros in 2018. Our economy creates more debt than what we need and does so by cutting the price of money: interest rates are kept at an artificially low level to encourage borrowing. These low rates make the economic system more unstable. They weaken the banking system. They create assets bubbles. And the debt increases to infinity.

This extra money is issued to stabilize the price level. It therefore captures the purchasing power created by lower prices and transfers it into debt. It is a profoundly inegalitarian mechanism that deprives the citizens of the euro area of 300 billion a year. It fuels the crisis of the purchasing power of the middle classes. History will more than likely consider the last ten years of massive money creation as one of the main root causes of political turmoil in Europe, including Brexit, Italian elections and French “yellow vests movement”.

The solution exists. It was first formalized by Milton Friedman, winner of the Nobel Prize in Economics in 1976. It consists in creating money and distributing it directly to the citizens, without any compensation. This creation of money allows to stabilize the price level in the long term. It gives back consumers the purchasing power taken away from them by creating money.

Specifically, each European citizen would receive a monthly variable amount typically between € 40 and € 120. Underage children would receive the same amount, distributed to their parents.

Although this scheme seems surprising, it is well known by the ECB. Peter Praet, one of its leaders, said in March 2016 that it was part of the Bank’s toolbox. It would make it much easier for the ECB to fulfill its mission of stabilizing inflation. The banking system would be greatly strengthened by avoiding artificially low rates. The economy would be more resilient to crises. Real estate prices would increase more moderately. And the inequalities would be reduced.

The ECB must now seriously consider this scheme and implement it before 2021. This is the only solution to avoid a very serious economic and social crisis.


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Une pensée sur “Monetary Dividend : A new tool of monetary policy to handle tech deflation”

  1. Excellent. Mais aussi.
    L’inflation ainsi créée ne compense pas la déflation technologique et celle due à la mondialisation. Exprimé en euros le pouvoir d’achat stagne, mais il augmente exprimé en quantités de biens et de services. Pour retrouver une impression de pauvreté il faut rajouter des nouveaux besoins, Netflix et nourriture transformée, par exemple.

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