The common image of “Helicopter money” evokes “pictures of a 100 trillion Zimbabwean dollar note that once bought two loaves of bread,” a Deutsche Bank report noted. Compare this to the term “Quantitative easing,” which sounds like “an austere word, well-suited” for today’s modern economy. Quantitative easing is “surely something infinitely more responsible” than shoot from the hip “helicopter money.”
That impression is wrong, very wrong, Deutsche Bank Macro Strategist Alan Ruskin says. It is the “Helicopter money” that is responsible in its surgical approach and QE that is random in its end result targeting, ineffective a boosting the real economy and has put markets at risk of a value readjustment.
QE is similar and “Helicopter money” generates disdain for the unfamiliar, but the impressions are wrong
“We have evolved to the point where familiarity with QE breeds acceptance, while unfamiliar helicopter money unfairly breeds contempt,” Ruskin wrote, urging readers to take an objective look at the concept of Helicopter money without reading into the bias of the term.
The “costly and bloated Central bank balance sheet” that occurred through QE will be difficult to reverse, Ruskin opines in a July 15 report titled “Trading Helicopter Money – avoid knee-jerk conventions.”
The same problems will not be associated with Helicopter money, which helps government engage in fiscal spending.
The first of those observations is that Helicopter money is not as haphazard as its title implies. Often times it means the central bank partnering with government to create money to engage in fiscal stimulus such as rebuilding infrastructure, repairing bridges and schools. All these projects have a much easier to predict economic result than does QE.
“Compared with the scale of QE liquidity dropped into financial institutions,” Ruskin wrote, “Helicopter money can be considered almost surgical.”
It is the economic impact of QE, which is criticized for not generating meaningful economic growth, that is difficult to target in terms of results in the real economy. It created bubbles in stock, bond and real estate markets that are in danger of popping. Helicopter is anything but dropping money randomly into society. The projects can be very targeted and, most significantly, the economic impact can be more accurately modeled.
“Helicopter money is less likely to distort every asset price in the economy, when compared with financial repressive regimes like QE and negative rates,” Ruskin wrote. “Helicopter legacy issues are minuscule compared with the QE overhang of liquidity in the system, and a costly and bloated Central bank balance sheet, which is so difficult to reverse.”
Helicopter money is open to government abuse as they can expand government projects without raising taxes
Helicopter money is not without issues.
One of the significant issues is that opening up a central bank to expanding their balance sheet to pay for government projects without raising taxes opens the system up to abuse. This could lead to government authorities pressuring Central Banks across the world, threatening independence.
“Remarkably we trust in unelected Central bank officials to do the right thing (when doing QE), but not elected officials in combination with unelected Central bank policymakers (when pursuing Helicopter money),” he wrote. “Presumably the idea is that unelected officials, backed by the reputation of the Central Bank institution, are impervious to the temptation of election cycle policies, something that elected officials are not.” The report did not address the potential negative impact additional rapid expansion of currency liquidity to serve fiscal purposes might have on central bank legitimacy and related currency values. It is unknown exactly how helicopter money might impact the value of currencies, perhaps first tested in Japan.
Helicopter money does not impact currencies to the extent that QE does
A big concern in this election year is that currency wars are providing trading partners an unfair advantage. In traditional economics, when a sovereign nation experiences economic difficulty its currency moves lower in price. This lower priced currency makes exports more economically attractive and thus serves as a method to improve a region’s economy.
“Because Helicopter money is less directed at using currency weakness as a core transmission mechanism than QE or particularly negative rates, Helicopter money should be more, rather than less acceptable to an international community worried about currency wars,” Ruskin wrote.
Ruskin notes that helicopter money could work well in an environment with a strong currency not by lowering the currency value. “Because helicopter money has an emphasis on monetary policy supporting fiscal policy, it has less focus on the currency channel, than QE and especially negative rates. In that light it should be less worrying for an international community that fears another round of competitive devaluations cloaked in unorthodox policies like negative rates.”
In a “normal world” helicopter policies – or QE, for that matter – are not advocated. The point of being able to address the normal business cycle with central bank ammunition at the ready is a key reason why some economists are scratching their head when they see emergency rate maneuvers and unconventional negative rates when the economy does not appear to be in similar distress.
“Helicopter policies are not advocated in ‘a normal world’. They are however almost inevitable in the next recession, if this is indeed a world of where secular stagnation with unusually low equilibrium real interest rates are prevalent,” Ruskin wrote.
There is good news. He says the “policies have been given ‘a bad rap’” and indicates that even the term “helicopter money” is a misnomer. To illustrate the point he calls upon a joke:
You may have heard the joke about the helicopter money dropped on country A where recipients saved it, country B that spent it, and country C where the citizens simply returned the money to the police. The point being that the impact of helicopter money cannot be perfectly calibrated, but it is almost surgical when compared with the scatter shot impact of the unorthodox policies currently pursued.
Helicopter money is not necessarily about widely throwing money at a nation’s citizenry. It can be highly targeted fiscal spending, determined by government, that can result in meaningful and measurable economic output. That message of responsibility is one not often associated with “Helicopter money.”
The US Federal Reserve official recently expressed an interest in the “Helicopter money” concept, meaning that after the Japanese experiment the US could be next on the list.