Helicopter Money: The Unconventional Economy Stimulation Option: Guide
Central banks have a number of tools at their disposal to use in times of economic distress. While Interest rate cuts have emerged as the preferred monetary policy for most central banks, they are not the only tools for stimulating any slowing economy. Helicopter money is a term for an unconventional policy measure that authorities can use when under immense pressure.
What is Helicopter Money?
Helicopter Money is a brainchild of Nobel Prize-winning economist Milton Friedman, who touted the idea of pumping more money into the economy to try to see the impact it would have on spending and saving.
The expansionary policy measure entails printing large sums of money and distributing it to the public in a bid to try and boost spending and stimulate a deflated economy. The fact that new money is transferred to the real economy, according to economists, could trigger increased spending in a subdued economy. For starters, some would use their new fortune to pay off personal debts while others would invest. In return, the new money would help alleviate poverty as well as increase government tax income.
By placing money directly in, the hands of people who need it the most, Helicopter Money proponents argue the new money would help fuel job creation and productivity. Likewise, new money in the hands of people would help improve inclusiveness in economies where there is a disparity in financial equality.
Helicopter Money idea gained prominence in 2002 when the then Federal Reserve governor Ben Bernanke referred to the Helicopter Money idea while arguing the central bank could increase the supply of money in the economy in a bid to push inflation higher.
Bernanke, in his arguments, reiterated that the prevailing deflation was because of a collapse in aggregate demand or severely curtailed consumer spending. In a bid to revert the situation and boost inflation, the policymaker suggested the possibility of handing money to people in a bid to boost their spending power.
Helicopter Money Post Financial Crisis
At the peak of the 2009 financial crisis, the U.S economy was under immense pressure with spending levels at all-time levels. With Bernanke at the helm as the FED chair, there was the talk of printing more money and handing it over to people in an attempt to try and boost consumer spending to shore up prices of items that had dropped to all-time lows.
Fast forward, the unconventional policy is once again gaining momentum as central banks around the world run out of the option to stimulate slowing economies. With some economies having cut interest rates to negative, the need to come with fresh ideas to curtail further slowdown is becoming increasingly crucial.
The U.S also has cut interest rates in a bid to lower borrowing costs so that people can borrow more, to drive spending. Policymakers have also pumped trillions of dollars Euros and pounds into the economy through quantitative easing.
Quantitative easing has seen central banks, especially the European Central bank, create and inject more money into the economy through the purchase of government bonds and the purchase of financial assets. While the policy was expected to enhance the trickling down of money to the real economy to boost money supply that has not been the case. Likewise, the ECB has struggled to maintain inflation levels close to the 2% mark fuelling suggestion of Helicopter Money play.
Helicopter Money Pros
Some economists argue that handing over money to consumers, as part of Helicopter Money play, could have a positive impact on fuelling spending, therefore, boosting inflation levels.
More money in supply should send people into shops, something that the economists believe could help boost confidence in the economy, consequently cause prices to rise. A spike in prices for goods and services is always seen as a good thing, as deflation often leads to extended periods of stagnation.
Proponents of Helicopter money have always argued that pumping more money into consumers’ hands is a sure way of boosting inflation levels compared to quantitative easing that appears to have fuelled a bubble in the stock and bond market. The fact that helicopter money leads to benefits being spread far and wide and not too few people has also seen it continue gathering support as a useful tool for countering deflation.
Helicopter money also stands out in part because it does not require authorities to borrow more money in a bid to fuel the economy. Consequently, the policy averts the possibility of a country plunging into more debt while also ensuring interest rates remain unchanged. Likewise, the policy tool tends to boost spending and economic growth compared to quantitate easing.
Helicopter Money Cons
As it is the case with any policy measure, Helicopter money also has its fair share of effects that continue to fuel oppositions. Opponents of the unconventional policy measure insist that handing money to consumers to increase spending isn’t entirely free.
For starters printing more money only goes on to devalues the buying power of whatever amount of money people have left in their accounts. More money in circulation also devalues the underlying currency the same way the issuance of more shares of a company dilutes holdings of the existing shareholders.
Printing and making more money available in circulation, as is the case with Helicopter money, might also trigger increased levels of inflation beyond the recommended 2% level. Zimbabwe is one of the countries that is struggling with one of the highest inflation levels following the printing of more money.
The fact that helicopter money is not reversible compared to quantitative easing has seen many economists downplay it as a useful tool for stimulating the economy for the long haul.
While Helicopter money appears to be theoretically feasible, it is still a hypothetical monetary policy tool. Its implementation in highly mature and developed economies is highly improbable, given the potential ramifications that might come into play.
Currency devaluation, as well as extremely high inflation levels, are some of the ramifications that policymakers would not be ready to contend with should injecting more money into the economy fail to have the desired impact. With helicopter money, the value of a currency could take a significant hit in the foreign exchange market, a move that would make imports extremely expensive, presenting yet another problem to a struggling economy.