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.
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?
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.