Helicopter Money mostly comes from the rarified air in Ivory Towers

Today I wish to examine the new fashion or as some might put it fetish in economics. This is the concept of helicopter money which is the equivalent of the new “bright young thing” in economic and in particular monetery theory. Here of course we immediately have a catch which is that the certainty with which it is pursued by its proponents is rather familiar indeed as are they. This is because a rather similar group of people made rather similar grand promises about other forms of extraordinary monetary policy. But now that the extraordinary has morphed into the ordinary we see that the promises were between mirages and charades. Even Bank of Englnd Governor Mark Carney told us as much last month. The tacit admittal that what was badged as progress was in fact the can – kicking into the future I have described on here for several years did not get the publicity it deserved. Governor Carney is now looking for the cavalry hoping people willforget that he was not only supposed to be it he encouraged that notion.

Also the rise of the concept of helicopter money has another problem which is that if things are going as well as we are continually told why do we need it at all? This remains a persistent critique of monetary “innovations ” as I observed yesterday when looking at Abenomics in Japan which so many told us was a leap forwards but in reality is stuck in the mud. Actually I can make an even more damning critique which is that all this monetary effort harms rather than encourages reform. It has glued the global elites in place and they have no intention of reforming at all. You do not need to take my word for it as President Draghi of the ECB asks for the same reforms each meeting. In fact it is the most certain part of his statement.

What is Helicopter Money?

The simple concept of money being dropped from helicopters works quite well for explaining this idea. In the UK with the large number of Chinooks in service with the Royal Air Force even the practicalities for once would work out. When they fly over South London I have to confess I do sometimes wonder if they are flying planning routes. Milton Freidman described the idea thus.

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

In essence the recipients would have to do very little to collect it and in a literal sense would only have to go outside to be showered in cash. This “free” present would then be spent quickly and the economy would be boosted by the additional expenditure, or so the theory goes. You may note that chucking the money out of the windows of an Ivory Tower would have a broadly similar effect except perhaps that with the height of modern Ivory Towers not only is the air rarified inflicting the symptoms of oxygen deficit on the inhabitants but the money could float quite a distance from its targets in the winds and jet streams.

Monetarism

Putting this another way we have just raised the money supply which we would expect to result in a combination of higher output and inflation. A couple of decades ago this was called monetarism which was how the thoughts of Milton Friedman were categorised then In an irony we were going in the reverse direction trying to reduce inflation via a form of anti-QE called Overfunding in the UK and higher interest-rates. The problem then was that we found that the mixture between output and inflation was not always favourable which is a flashing amber light for the proponents of helicopter money.

However some care is needed here as some proponents want more inflation. Apparently the air is so rarified in some Ivory Towers that the oxygen debt so created makes the inhabitants think that more inflation leads to more economic output. They close their minds to the two realities of this. The first is that they will have to claim that some of the inflation such as higher house prices are in fact an economic benefit  rather than the reverse, this is one of the reasons why they cheerlead for “improved” as in lower inflation measures. It also ignores the fact that the lower level real wages created by the higher inflation will depress economic output in the way it did in the UK in 2010/11.

Permanent and Temporary

The literature says that the money created has to be permanent. this does create a problem as in a world where temporary can mean any time period up to infinity and sometimes beyond what does permanent mean? Let us hope that our recipients spend the money quickly whilst our theorists debate!

Is this QE or Quantitative Easing?

Many thought of QE as “printing money” which rather awkwardly it was and was not. A bit like Heisenberg’s Uncertainty Principle economics found itself in a very uncertain world. For example the QE of the Bank of England was mostly deposited back at the Bank of England as the recipients decided what to do next. If we look for evidence of the impact we see perhaps higher house prices lower Gilt yields and higher equity prices but there are issues even with these. What I mean by this is that if QE was working as well as the bank of England hoped ( i.e pumping up house prices) we would not have had the Funding for Lending Scheme!

Where QE has approached helicopter money is the way in which it has extended out. What I mean by this was much of it was badged as short-tern but latterly under the label of “Operation Twist” much longer-dated bonds have been bought with the UK going out to 2065 last time I checked. Crucially there is also no plan at all to redeem or reverse the operation. My suggestion in City-AM from a couple of years ago my not be far off unique. To put it another way if the Bank of England had any real plans to reverse QE it would not have given the job to Dame Shafik. I also note that Mario Draghi is issuing plans beyond his own term at the ECB.

Where QE is not so far been printing money is that central banks have no overtly financed government spending. The Bank of England has got close but has kept to its rule of not buying a bond for at least 3 weeks after it has been issued. Of course implicitly they are helping both by providing a buyer of last resort and reducing bond yields but not so far explicitly. I am talking of the major central banks here as for example if I recall correctly the Bank of Ghana did. Oh and for some buyer of last resort is pretty much buyer of first resort isn’t it?

Comment

There are various issues here which pose their own problem.The most obvious to me is that why do we need this in what we are told is a recovery? The “More, More ,More” theme of both Andrea True Connection and Agent Smith which I started over 5 year ago gets ever more backing. Also if the previous policies were such a success why do we need it at all?

In reality we find that the results are likely to be patchy at best as we wonder what the mixture will be between output and inflation. Should all the QE have future inflationary consequences then we may find this is a problem squared. Also we have travelled the road from monetary to fiscal policy where it would be simplest for the central bank to create the money and give it to people. As it could not do so without political approval we would see the last remaining brick or two in the façade of “independence” come crashing down too.

So it would be a fiscal boost by another name. Can they work? Of course they can help as we saw in Spain on Monday. Are they the magic key to the door? No or yesterdays post would be describing what an economic success Japan is.

For me the use of helicopter money is an a real deflationary and depressionary spiral. So why is it being proposed when we apparently and officially have both economic growth and house prices have been soaring? Also the one place which might be a test case which is Greece seems the least likely to get it.

 

 

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21 thoughts on “Helicopter Money mostly comes from the rarified air in Ivory Towers

  1. Hi Shaun

    You pose the question why? The only thing that makes sense to me is that it generates inflation as a form of soft default to lessen the debt burden. However, it will only do this if wages respond and, as you say, they have been somewhat reluctant to do so; it’s more likely that real incomes will decline and growth will take a hit which puts us back into the downward spiral.

    I see all this as the last(?) desperate gamble of the system and nothing more.

    • I was just about to make the same comment! Rather than tackle the disease that makes endless inflation a necessity they chose to treat the symptoms. This is going to be an endless problem until governments and the populace learn to live within their means. Unfortunately no western government is prepared to have a grown up conversation with its tax payers along the lines of ‘ if you want a health service, benefits, pensions and welfare at today’s level then you are going to have to pay more tax, much more tax – on the other hand if you don’t then we need to cut expenditure and hence services to match our income’. Unfortunately most voters would simply vote for the party that pretends it can continue with fiscal alchemy. Most counties are enjoying a lifestyle they can’t afford and Greece shows what can happen when reality bites.

  2. This is your best blog to date…succinct and understandable to your average bod like me who isn’t an economist. TPTB have tried to pull the wool over our collective eyes for long enough.

    A plague on all their houses say I!!

  3. The most obvious to me is that why do we need this in what we are told is a recovery?

    indeed , Shaun, indeed !

    one wonders when the MSM will cotton onto this …….. perhaps never considering their past performance !!

    “where it would be simplest for the central bank to create the money and give it to people”

    Wasnt that the reason for PPI insurance claims ? 😉

    it will never work , for long , what is needed is what I posted yesterday

    real wage increases , which can only happen if something is done about the (un) free trade agreements made by WTO ,etc .

    they have made a short term drop in prices followed by wage repression and unemployment for the peon/plebs ( and the master stroke of debt burden ) just so we can follow some specious arguement that the super riche need more money to make the economy better

    well it is better – for them !

    the answer, apparently , is to stuff the horse with even more grain to feed the sparrows at the rear end …….

    oh well , back to the popcorn

    Forbin

    • The chances that MSM are going to cotton on to any of this (with the honourable exception of Private Eye, which has, inter alia, been harping on about foreign ownership of London houses through offshore companies for months) are precisely zero. The dominance by the BBC (which isn’t exactly a crusading organisation, except on behalf of the EU) and a few newspapers which have cut staff back over the years hardly encourages great journalistic enterprise.
      We are in such a fantasyland that Jeremy Corbyn can talk about spending more without everyone laughing at him. What more can we say?

      • To be fair,the BBC have been great cheerleaders for the baking bailouts.

        I always loved the way they used to report the housing market rising as if we were saved from the ship sinking by it.

        • “I always loved the way they used to report the housing market rising as if we were saved from the ship sinking by it.”

          We probably were Dutch, IMF research suggests that 90% of UK economic and market crashes were preceded by housing market crashes, whilst a lower percentage (I forget the percentage but it wasn’t much lower than 90%) of UK economic and market booms wee preceded by housing market booms.

          The relationship holds for most of the world but is not as closely correlated as the UK, probably because of average Briton’s house fetish.

  4. Hi Shaun,
    Very interesting as usual. I would say that one key difference between QE and helicopter money is that 99.9% of the population have no clue about what QE is, but would certainly be amazed at helicopter money and would think that politicians have gone mad.
    The whole concept, in my humble opinion, of responsible money has all but disappeared. Whether it is QE, huge deficits, huge debt levels, the derivatives market, bankers’ bonuses, Panama, it all adds up to a dislocation between the reality of life and the rarefied world of an elite. Ivory Towers indeed.
    By the way, as an aside, have you seen the hilarious Mossack Fonseca note in the Guardian, saying that they have been hacked and they will be going after the criminals who hacked them…

    • Hi Dutch

      Helicopter Money is invariably presented as a free lunch when like anything there are risks and costs. Let me present another issue which is that several countries these days can do better than it as they can issue bonds at negative yields or better than free money. Yet those that have it are those most reluctant to use it! Imagine if there was a German Dm, by now they would be borrowing at -2% whilst the Bundesbank would be a hedge fund…..

  5. Give me all the helicopter money you want, I’m always happy to spend other people’s money on just about anything, mind you, once I’ve spent the first amount, then what?

    • Hi Noo2

      That is a good question which relates to the balance between permanent and temporary and the proposed use of Helicopter Money in what we are told is a boom. In a depression which is a possible legetimate use of HM there is a clear objective which is to end it. Even if you did not get the exact amount first time you have an objective and could reload.

      But using it in a claimed boom has the issue of what the objectives are? So far they have been absent….

  6. Hi Shaun, A great blog as usual. Wage inflation is proving elusive as there has been a systematic and concerted effort to reallocate the wealth to the top for 25 years or more. Remember the trickle down economic theory of the Thatcher era? Union strength has evaporated, automation has simplified tasks and employers find ever more elaborate ways to exploit labour-like zero hours and ‘self employed’ contracts. It’s the same across the pond too. Any GDP growth is creamed off long before it hits workers pay packets. The one thing that gives me some hope is that this is getting more publicity in recent months even in the MSM and now the Panama leak is fanning the flames of disquiet as the rich and powerful make bigger and bigger piles of loot.

    • Hi Zummerzetman and thanks.

      I suspect the Panama Papers are the small tip of a large iceberg. I hope that the media manages to get the difference between legal and illegal activities of this sort. As to trickle down economics we did get some but over the past decade the tap ran dry and in some cases via inflation sucked money out of real wages. For this spell the economics of Karl Marx has moved past Milton Friedman.

  7. Hi Shaun,
    It’s Interesting that Heisenberg gets a mention. I think many bankers have lost sight of the difference between Risk and Uncertainty. Thinking there’s no practical difference can turn out to be an expensive mistake. Donald Rumsfeld famously tried to clarify things for us –
    ” There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don’t know. But there are also unknown unknowns – there are things we do not know we don’t know. ”

    • Hi Eric

      I have always thought it was a shame that it was Donald Rumsfield who made such a good job of explaining the serially uncorrelated error term. As an ex option trader and analyst I have spent much time considering how bad we are as humans and especially as an establishment are at figuring that out. I guess the latter end up believing their own hype.

      Professor Feinman’s book “What do you care what other people think” is very good on this and the consequent Space Shuttle disaster.

      • Yes us humans seem to naturally prefer risk over uncertainty.
        Ellsberg’s Paradox is a good simple explanation of the problem.

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