Is Helicopter Money the Hidden Ammunition of Central Banks?

In a general condition of weak economic growth and low oil prices pushing down inflation, the central banks are trying to convince investors that they are not short of options. In this context, “helicopter money” has become an extensively discussed topic by several experts. This term is connected to central banks giving money to the public or private sector in order to stimulate spending and hence price growth. However, it has moved from fantasy to taking up a possible role in the monetary toolbox. Helicopter money has been proposed as an alternative to Quantitative Easing(QE) when interest rates are close to zero and the economy remains weak.

The ECB president keeps repeating his central bank will not “surrender” to low inflation. In this regard, Mario Draghi also said “Legal research should be conducted to check whether ‘helicopter money’ would be legally feasible in the Eurozone”. European Central Bank officials are already debating about what President Mario Draghi calls a “very interesting concept”. In 2002, the former Federal Reserve Governor Ben Bernanke also commented “money drop would almost certainly be an effective stimulant to consumption and hence to prices.” The main argument for helicopter money, at least in Europe, is the accusation that the ECB is almost out of ammunition.

The idea – first introduced by one of the fathers of modern central banking, Milton Friedman – is to motivate spending and investment directly rather than influence bond yields or sentiment. Nevertheless, there are many arguments against it; the Director of Bruegel, Guntram Wolff said “There’s plenty of evidence to suggest that, but no other central bank has tried out helicopter money. There is a reason for that: it’s a fiscal policy tool that needs democratic approval. Giving away money is a transfer of wealth because it’s inflationary, it works like a tax on all other holders of money. That makes it highly controversial, especially in the eurozone.” 

Therefore, the final outcome of that policy would be positive for borrowers but strongly harmful for lenders. However, it is fair to remind that the entities which rely mostly on debt are small and medium-sized enterprises, often recognized as the engine of the global economy and to be responsible for driving innovation and competition.

Economists have used the term ‘helicopter money’ to refer to two different policies. The first emphasizes the ‘permanent’ monetization of budget deficits. In this way, the public would realize that the higher deficit is financed via the printing press, without involving lower spending or higher taxes in the future to repay the debt.The second set of policies concerns central banks making direct transfers to the private sector, bypassing the involvement of fiscal authorities. A central bank makes a profit – seigniorage – by paying less on its liabilities (cash and reserves) than on its assets (mainly loans). According to many economists, the European Central Bank could lower its lending rate below the rate paid on banks’ deposit reserves. That would be another type ofmoney drop. Or the central bank could offer loans to banks at zero rates with no maturity date (perpetual maturities). This is to say that limits between pure money helicopter and a hybrid expansionary monetary policy are often imposed by our imagination.

ECB and BoJ may become the first central banks to take advantage of the “helicopter money”. Nonetheless, some argue the banks are already deploying something close to the money drop by purchasing many government bonds (on the secondary market), yet they do not buy them directly. However, zero or negative interest rates are failing to increase consumer prices, while the Fed’s attempt to normalize monetary policy looks likely to backfire.

So, as suggested by Milton Friedman, If everything else is failing, why not try helicopter money? The full transition to an explicit monetization of government spending would have a powerful effect on the public’s expectations. But we should not underestimate the risk that this could be detrimental for financial markets. Once the fiscal authority has free access to the printing press,the temptation to continue using it could be too difficult to resist.

London, May 5th 2016

Luca Cartechini, Head of Asset Management




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