In this issue of “Thin Slicing* the Markets,” Matthias Hoppe, senior vice president and portfolio manager, Franklin Templeton Solutions, explores the concept of “helicopter money” programmes as economic stimuli and how they differ—perhaps—from the quantitative easing programmes initiated by central banks worldwide. He details their potential pitfalls and when he believes they might benefit an economy.
Senior Vice President, Portfolio Manager
Franklin Templeton Solutions
It has been discussed in theory for centuries. Philosopher and economist David Hume is said to have first conceptualized the idea in the 18th Century. Influential British economist John Maynard Keynes referenced it in the 1930s, and then in 1969 American economist Milton Friedman (who later won a Nobel Prize) talked about literally dropping money out of helicopters for citizens to pick up. The theory is that a central bank seeking to jump-start economic growth and inflation in an economy that is operating considerably below potential could in essence “print” money and distribute it to the public unconditionally.
For the most part, “helicopter money” programmes have never been seriously contemplated as legitimate monetary tools for use in modern advanced economies. There are instances of their application historically (Weimar Germany in the 1920s and Zimbabwe in the 1990s, for example), but usually with disastrous consequences for inflation. In recent months, however, the rhetoric associated with such policies has increased, both in the media and with policymakers. In March of this year, European Central Bank (ECB) President Mario Draghi reportedly described it as a “very interesting concept.”
Indeed, it is interesting that the renaissance of this old idea comes now. Bear in mind, we have already witnessed an unprecedented and globally choreographed eight years of quantitative easing (QE) initiatives, none of which—outside of perhaps pushing investors up the risk curve and inflating asset prices—has really achieved its objective. In fact, some central banks, like the Bank of Japan and the ECB, have already pushed beyond traditional QE and introduced negative interest rates—in effect imposing a charge on banks that keep cash on deposit to encourage them to lend it out. Despite all of these aggressive measures, however, we have yet to see any meaningful consumer price inflation, much less sustained demand and growth. Why would we expect differently from helicopter money? To better frame the discussion, let us answer one question: How do so-called helicopter money programmes and aggressive QE policy differ?
There are various ways a central bank could implement a helicopter programme. No, the money would not literally be dropped from a helicopter (though that might make for an amusing reality television show). More likely, central banks would purchase newly issued government bonds. The proceeds from these bonds (the newly printed money) would then be used to perhaps finance infrastructure projects, or maybe a one-off tax cut as suggested by former US Federal Reserve (Fed) Governor Ben Bernanke in 2002. In either case, the newly created currency would be used to purchase government bonds—just as it is with QE initiatives. The key distinction between the two is that with a helicopter drop, the central bank promises to never sell the bonds or withdraw from circulation the money it created to purchase them. In this way, the central bank is essentially “gifting” cash to the public. In theory, this should prompt consumers to spend more, prices to rise and ultimately nominal gross domestic product to also increase.
Helicopters Are Already in the Air
The distinction that the proponents of a helicopter experiment would make when comparing it to current QE programmes is that direct transfers to the public would increase the efficacy of the policy by directly influencing aggregate demand, rather than hoping for an indirect effect from artificially suppressed yield levels, induced by large-scale asset purchases of government, mortgage and corporate bonds. Knowing the additional money would not be withdrawn, the public and consumers would be more willing to spend it, therefore sparking the sustained economic growth that traditional QE efforts have yet to achieve. However, in some ways I would argue a form of helicopter money is, in fact, already in place.
Consider the largesse of government debt that many central banks around the world have stockpiled in the wake of the 2008-2009 financial crisis. And a great majority of newly issued government bonds have landed on the balance sheets of the world’s central banks.
While in theory, the QE “experiments” implemented post-2008 were intended to be temporary, I believe that in reality the expectation is that central banks around the world have no intention of ever unwinding the extra liquidity they have created, i.e., sell the bonds back to the financial market. While this has never been communicated explicitly, implicitly this is essentially the message conveyed by policymakers’ actions and rhetoric. So in this sense, helicopter money is in some ways already upon us. But where is the spending?
Should We Blame the Politicians?
The irony today is that central banks are dealing with inflation rates that are well below normal targets, while governments have rejected engaging in expansionary fiscal policies to manage macroeconomic conditions. Particularly in the developed economies, we see fiscal policies that remain historically tight, despite long-term interest rates at record lows. Is it reasonable to ask if it would not make more sense for governments to invest aggressively in things like roads, schools, green technologies and public utilities—what I call “old-fashioned fiscal stimulus”—when they can essentially borrow for free? So why is it that central banks appear to be the only institutions willing to act, while governments essentially remain on the sidelines? Perhaps the politicians know themselves all too well, and are exhibiting restraint in making the leap to a helicopter money programme for fear of not being able to resist returning again and again to the forbidden fruit once its sweet nectar is experienced the first time.
If helicopter money was used to finance public projects as described above, it would likely be positive for nominal growth and boost inflation expectations in the short term and probably inflation in the longer term as well. That said, I do not expect such a policy to be implemented in the near future. Global central bankers did not send any signals at the Fed conference in Jackson Hole in August that they are more worried about growth or inflation, or that they need any new monetary tools to effectively hit their inflation targets.
The bottom line is that helicopter money in its purest form seems unlikely anytime soon, though it is not a zero probability anymore. There could be greater coordination between fiscal and monetary policy in Japan, for example.
Looking at the bigger picture, I would suggest that the expansionary monetary policies that have accompanied us for several decades have already caused real and observable market distortions (the 2008 US housing bubble, for example). And the implementation of the global QE intended to smooth the 2008 distortion is an extension of those policies. While I am not sure a helicopter money programme would be a prudent move at this stage, I would consider it as another iteration of unorthodox monetary policy. In theory, such a programme could perhaps be successful if it were strictly managed, with rules and laws in place that insulate it from political abuse. But that, in reality, may not be a rational expectation.
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