Here is an excerpt from a recent TSI commentary about another absurd
course of action now being seriously considered by the monetary
maestros.
Once upon a time, the concept of “helicopter money” was something of a
joke. It was part of a parable written by Milton Friedman to make a point
about how a community would react to a sudden, one-off increase in the money
supply. Now, however, “helicopter money” has become a serious policy
consideration. So, what exactly is it, how would it affect the economy and
what are its chances of actually being implemented?
“Helicopter money” is really just Quantitative Easing (QE) by another
name. QE hasn’t done what central bankers expected it to do, so the idea that
is now taking root is to do more of it but call it something else.
Apparently, calling it something else might help it to work (yes, the people
at the upper echelons of central banks really are that stupid). The
alternative would be to question the models and theories upon which QE is
based, but such questioning of underlying principles must never be done under
any circumstances. A Keynesian economist calling into question the principle
that an economy can be made stronger via methods that artificially stimulate
“aggregate demand” would be akin to the Pope questioning the existence of
god.
The only difference between QE as practiced by the Fed and “helicopter
money” is the path via which the new money gets injected. Under the Fed’s
previous QE programs, new money was created via the monetisation of debt and
ended up in the accounts of securities dealers*. Under a “helicopter money”
program, new money would still be created via the monetisation of debt.
However, in this case the new money would be placed by the government into
the accounts of the general public, via, for example, tax cuts and welfare
payments (handouts), and/or placed by the government into the accounts of
contractors working for the government.
If promoted in the right way, “helicopter money” could have widespread
appeal among the general public. Unlike the Fed’s traditional QE, which had
the superficial effect of making the infamous top-1% richer and the majority
of the population poorer, the average member of the voting public could perceive
an advantage for himself/herself in “helicopter money”. Unfortunately,
regardless of who gets the new money first there is no way that an economy
can be anything other than weakened by the creation of money out of nothing.
The reason is that the new money falsifies the price signals upon which
economic decisions are made, leading to ill-conceived investments and other
spending errors.
Due to the distortions of price signals that they bring about, both
traditional QE and “helicopter money” are bad for the economy. However, an
argument could be made that “helicopter money” is the lesser of the two
evils. The reason is that with “helicopter money” the effects of the monetary
inflation will more quickly become apparent in everyday expenses and the
popular price indices. That is, “helicopter money” will quickly lead to
inflationary effects that are obvious to everyone. This limits the extent to
which the policy can be implemented.
Putting it another way, traditional QE had by far its biggest effects on
the prices of things that, according to the average economist, central banker
and politician, don’t count when assessing “inflation”, whereas the effects
of “helicopter money” would soon become obvious in the prices of things that
do count. A consequence is that a “helicopter money” program would be
reined-in relatively quickly and the long-term damage to the economy would be
mitigated.
With regard to the chances of “helicopter money” actually being
implemented, we think the chances are very good in Japan, very poor in the
euro-zone (due to there being a single central bank ‘serving’ a
politically-disparate group of countries) and somewhere in between in the US.
Although it presently seems like the more extreme policy, the US has a
better chance of experiencing “helicopter money” than negative interest rates
within the next two years. This is because a) the next US president will be
an economically-illiterate populist (regardless of who wins in November), b)
the average voter will likely perceive a financial advantage from “helicopter
money”, and c) hardly anyone outside the halls of Keynesian academia will
perceive anything other than a disadvantage from the imposition of negative
interest rates.
In summary, then, “helicopter money” is QE by a different name and path.
It would inevitably reduce the rate of economic progress, but it has a
reasonable chance of being implemented in the US the next time that
policy-makers are desperate to do something.
*Every dollar of Fed QE adds one dollar to the commercial bank account
of a Primary Dealer (PD) and one dollar to the reserve account at the Fed of
the PD’s bank, meaning that every dollar of QE adds one reserve-covered
dollar to the economy-wide money supply.
