As quantitative easing is being seen as a failure by more and more people, a monetary stimulus option that was once considered an impossible fantasy is getting a serious look on both sides of the Atlantic.
Called "Helicopter Money" or a "Helicopter Drop," the idea is to bypass banks that refuse to increase lending, and inject cash directly into the economy. This cures the "Wall St. instead of Main St." problem that many see as the biggest failure of quantitative easing.
Helicopter money is an idea that has only been bandied about by economic theorists, until now. But much like negative interest rates, the idea is moving from fantasy to reality.
The term "helicopter money" was coined by famous economist Milton Friedman to describe the action of a central bank just printing up a large sum of money and giving it away to stimulate the economy. This is the ultimate gambit for central banks desperate to force the private sector to make loans that will then be spent in the broader economy. In fact,
Proponents of a one-time "helicopter drop" of money contend that it would cost far less than failed quantitative easing policies already taken by many central banks, for arguably greater results. Advocates include the Labour Party of Britain, which advocates a "QE for the People" policy.
Fiscal policy hawks see this as a direct monetization of government debt, long a taboo for central banks. Aside from that, opponents fear that governments would find the prospect of funding tax cuts and spending with freshly printed money too addictive to give up. The political pressure might build to the point of destroying the necessary independence of the central bank.
One cautionary tale involves one of the earliest examples of helicopter money -- 1930s Japan. Finance minister Takahashi Korekiyo had the Bank of Japan underwrite a large federal deficit, which was used to modernize and expand the economy. When he tried to reign in government spending after the economy recovered, he was assassinated.
Two Types of Helicopter Money
Discussions center around two types of helicopter money: Checks directly to taxpayers, or money given directly to the government to repair the nation's crumbling infrastructure. Both these options are funded by a central bank creating money out of thin air.
Some economists warn that, by the time any infrastructure projects were approved, it would be too late for them to make a meaningful difference. The crisis would simply be too large. The direct injection of money into the broader economy must be done before the crisis hits, not during or after, to have the most effect. (Coincidentally, the same holds true about buying gold as an "insurance policy" to protect against economic shocks.)
In order for helicopter money to work, it must be made abundantly clear that this is a one-time only event. Friedman himself said that a helicopter drop would do more harm than good if it weren't made clear that there would not be a second one.
Perhaps the most difficult aspect of doing a helicopter drop is getting the amount of "payload" correct. Too little means the results are too low to stimulate the economy, while too much could ignite high inflation. Given that the world is afraid of DEflation right now, the temptation would be to err on the high side.
Bank of America analysts last month tallied the number of rate cuts and amount of quantitative easing by the world's central banks. By their calculation, there have been 637 rate cuts and $12.3 trillion spent on QE. Even so, most of the world is in danger of falling into a deflationary spiral (Japan has already been there for years.)
Even though inflation is near or below zero, abandoning QE for a helicopter drop could have severe consequences, according to Bundesbank president Jens Weidmann. "Helicopter money is not manna that falls from heaven - it would actually rip huge holes in central bank balance sheets," Reuters quotes Weidmann as saying. "Ultimately euro zone states and therefore taxpayers would end up having to bear the costs because there wouldn't be central bank profits for a long time."
Flying the Inflationary Skies
While ballooning government debt from helicopter money is certainly a danger, risks of hyperinflation are thought to be much lower. The Sydney Morning Herald quotes the Bank of England as saying that global interest rates are the lowest since the birth of the banking system 500 years ago.
Investment bank HSBC says that the economic slowdown in developing nations needs to be fought now, and QE and negative interest rates have failed to do the job. Their report mentions "Helicopter money could be the ultimate solution to raise nominal GDP since it increases the total stock of assets held by the public (at least initially) and encourages them to spend. Delivering the optimal split between growth and inflation would be no mean feat though: historical experience suggests the impact on inflation is far from linear." It calls the ECB's policy of buying government bonds "helicopter light," noting that it has failed to reverse deflationary pressures.
Money From Heaven, Or Money From Yellen?
Given the state of the US economy and the direction of monetary policy, the Fed is probably the one major central bank that is least likely to implement helicopter drops. Of course, just like negative interest rates, the Fed refuses to remove the idea of helicopter money from its toolkit. The Wall St. Journal notes that waiting until the crisis arrives will be too late for helicopter money to work.
The WSJ relates how Chief market strategist Nicholas Colas of Convergex looked at two recent events that are similar to a helicopter drop -- tax refund checks. Taxpayers received a $600 refund check in 2001, and a $1,200 check in 2008. People spent roughly half of the 2001 refund, but less than 1/3 of the 2008 check. The difference is blamed on consumer sentiment about the economy. Everything was peachy in 2001, but the global financial crisis on 2008 led to taxpayers holding on to most of the second refund.
Incidentally, those tax refunds show that the details in disbursing a helicopter drop are already in place. The main danger of direct economic stimulus such as this, is it being hijacked by politicians to fund endless spending. As history from Rome to Zimbabwe has shown, once the politicians get their hands on the printing press, economic disaster is sure to follow.
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