Helicopter Money, will it happen

Helicopter money has been mentioned once in a while over the years but lately more and more people have started to propose helicopter money as an alternative to Quantitative Easing (QE). The expression was first used by Milton Friedman in The Optimum Quantity of Money, published in 1969.

For Friedman, helicopter money was unique event, never to be repeated, which would allow debt reduction and raise aggregate demand. The money would be distributed directly to the people to avoid problems associated with money creation by private banks. Another result of helicopter money is higher inflation, which is desired in many parts of the world at the moment. Or maybe one should say some countries are in desperate need of inflation.

Central banks have tried ZIRP (Zero Interest Rate Policy), NIRP (Negative Interest Rate Policy) and QE but the results have been limited. Can helicopter money solve the problems? A very interesting question but as usual, things are more complicated than most people think. Obviously, the helicopter is just a methaphor. Most likely banks would be used for the distribution of
helicopter money. The money would just magically appear in people’s bank accounts.

But this very simple approach is unlikely to do much good in most countries. A lot of people would use it for consumption, buying goods made in China. It would be good for China, and other countries that export a lot of consumer products but for countries like the US which imports a lot of cheap goods, the benefits would be limited. In order to raise inflation in countries such as the US, multiple drops of helicopter money would be required. But this could very easily get out of control, undermining the trust in the currency and leading to hyperinflation.

Therefore economists have suggested various variations of helicopter money. In some cases helicopter money has been suggested as source for funding government investment programs rather than be given directly to the people. One problem with helicopter money is that it has never been tested, so no one can be sure what the outcome will be. It is very easy to find opponents to any form of helicopter money. But given that QE has not managed to solve the problems, more and more economists have started to talk about helicopter money as a possible solution.

Here it is worth pointing out one important difference between QE and helicopter money. QE, at least if you believe central bankers, increases the money supply temporarily while helicopter money increases it permanently.

So will helicopter money actually happen? Most experts believe the answer is no. At least not yet, maybe further down line. A more likely solution is to try to combine conventional fiscal stimulus and QE. This combination should have the same effect at helicopter money but not being as controversial. Fiscal stimulus would mean that government debt would increase but given that most governments can borrow cheaply this is in most cases not really a problem. That a lot of people like to call it a big problem is another thing. Given that QE can be seen as suspension of government debt, QE would actually make such discussions irrelevant.

Leave a Reply