What the heck is Helicopter money? Well, imagine you were walking down the street, and all of a sudden a helicopter appeared overhead and started dropping $100 bills from the sky. Would you pick one up? Maybe pick up a bunch? Would you trust it? And if you trusted it, would you spend it?
And if you spent it, would it help boost the economy?
These are all questions Nobel Prize winning economist Milton Friedman asked back in the late 1960’s. His example of a helicopter dropping money led to the name, and his questions are being asked again.
Though it wouldn’t actually involve dropping money from the sky, Helicopter money is a controversial idea. So why are more and more people talking about it?
Low interest rates and quantitative easing have failed
In an effort to generate growth in stagnant developed economies, central banks have taken two steps. The first, and most traditional step was to lower interest rates. Lower interest rates can encourage financial institutions to lend and encourages consumers to take on more debt, which is supposed to increase spending and boost economic growth.
But it isn’t working.
Both Japan and the European Union are experimenting with negative interest rates. Interest rates are near zero in much of the world. While this should be spurring economic growth, much of the global economy remains stuck, particularly Japan – fighting desperately against deflation. So, even the traditional interest rate policy is being taken to an extreme.
The second measure used by central banks has been quantitative easing (QE). QE is designed to put more money into the financial system. The central bank purchases securities – particularly government bonds and securities in the private market. This increases the quantity of private bank reserves, which should give banks the chance to increase lending, thus increasing consumption and growth.
But it isn’t working either.
Central banks are getting desperate
There is a clear trend here: Increasing desperation. Interest rates are a relatively hands off-tool. The central bank changes the interest rate it charges to banks, and the banks pass the new rate throughout the system, eventually having an effect on consumers spending habits.
Quantitative easing is more direct, putting money directly into banks to encourage lending and increase consumer spending. But it still avoids directly helping consumers, instead using banks as the intermediary. Unsurprisingly, the banks haven’t lent out much of the new money, a key reason QE isn’t working.
Despite these desperate measures growth has not returned, and more of us are paying the price for the stagnating economy.
That is why we are talking about helicopter money.
Giving money directly to consumers
While nobody is seriously considering dropping money from a helicopter, there is increasing discussion of putting money directly in the hands of consumers. Whether in the form of a one time stimulus, or a recurring payment, helicopter money would involve the central bank supporting the injection of funds directly to individuals in order to encourage consumption.
In a note to clients, Ray Dalio – Chairman and CIO of Bridgewater Associates – the world’s largest hedge fund, described a range of stimulus measures, which included a description of helicopter money, which is no more complicated than “sending people cash directly.”
Really, helicopter money is not more complicated than that. It’s about the central bank giving money directly to the people.
Helicopter money is at least an acknowledgment that its long past time our institutions focused on helping people directly, rather than taking a circuitous route through the private banking system.
A Universal Basic Income – if it was financed through the central bank rather than traditional government spending – would be an example of helicopter money.
Helicopter money leads to some very interesting concerns and potential scenarios:
Since central banks can always print money (or create it on a computer), the government could conceivably borrow unlimited amounts from the central bank through perpetual bonds (bonds that pay interest at a low rate for eternity). The government could be running a large budget deficit, but the government debt would not be increasing, since the central bank would be taking on the additional liabilities. The central bank would create new money to refill the coffers.
Of course, if taken to an extreme, inflation would be a key concern.
You may be thinking, “How could just creating new money out of thin air and distributing it to people actually help the economy?” Well, consider that money itself is a shared mental agreement with no real underlying value. Our entire system is a confidence game.
Helicopter money would rely on trust – just as our whole system does
The success or failure of helicopter money would hinge on whether people trusted the new money. It would also depend on whether the world trusted the currency of the countries that engaged in it. If people trust it, helicopter money could lead to increased growth and economic output. If people didn’t, it could lead to hyperinflation and economic chaos.
But again, it must be emphasized that money only has value because we believe it has value. There is nothing that would stop helicopter money from boosting the economy, so long as there was positive confidence that it was would work.
An interesting Investopedia article talks about the idea of how the government uses money. The article explains that any country that can use its own currency could fund their government simply through printing money. The current structure is a result of the way we have decided to set up our society.
So, we could be funding our entire government without taxes and without government borrowing. The structure of our economic system is a choice.
The very fact we are talking about helicopter shows that the old approaches have failed. As I’ve written, our world seems dangerously close to another economic collapse. The rise of inequality and potential job losses due to automation make our present system unsustainable. In this dangerous environment, we need to think big.
As politicians and central bankers run out of ideas, it may be that helicopter money will give the economy the boost it desperately needs.