It may sound like a scene from a movie, but dropping dollar bills from the sky is an actual monetary consideration. Well, maybe not exactly.
The idea of “helicopter money” was first introduced in a 1969 proposal by Nobel Laureate Milton Friedman. In his 300-page book, "The Optimum Quantity of Money" Friedman proposed an experiment designed to answer the question: How much money would a perfectly balanced economy need in circulation in order to guarantee a community's ability to buy goods and services?
This 47-year old idea posits a way to kick start an economy by dropping money on its citizens and the out-of-the-box concept is currently being revisited by several major banks in Europe.
In his book, Friedman included the important proviso that the ‘money drop’ could only be a one-time, never-to-be-repeated event and economists are divided on whether Friedman would employ his “helicopter money” idea today, given what is happening in the global economy.
After more than 600 interest-rate cuts and $12 trillion of asset purchases since the financial crisis failed to move the inflation sufficiently, central banks are looking for more creative ways to get the world out of its disinflationary rut and this could mean directly financing government stimulus programs. Some see Friedman’s monetary idea as the next silver bullet.
Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks. Some hedge fund owners have voiced interest in the potential of the idea and ECB’s Mario Draghi calling it a “very interesting concept.”
The theory, which has never been put into action by a modern major economy, involves melding monetary and fiscal policies together. Cash poor governments would then sell short-term debt straight to their central bank in exchange for newly printed money which is then injected straight into the economy via tax cuts or spending programs. Intermediaries such as banks are totally bypassed.
The idea is to spur spending and investment directly rather than influence bond yields or sentiment. Central banks can be saved from permanently underwriting governments by establishing growth or inflation limits.
The current failure of inflation to accelerate in much of the world is what is moving the idea forward. Despite the 637 interest rate cuts that have been implemented and the $12.3 trillion spent on assets, there remains an estimated 489 million people who continue to live in countries where rates are negative.
The notion of introducing such a drastic maneuver has had mixed reactions. According to Stephen King, senior economic adviser to HSBC, “The helicopter option is simple, easily implemented and, for some, offers the closest thing to a free lunch. If this sounds too good to be true, that’s because it is.”
Critics, however, say scattering money around would eventually lead to runaway inflation and expanded government debt. It could damage the independence and credibility of central banks and there is a chance the policy could backfire if households sit on the money instead of spending it.
President Jens Weidmann of the Bundesbank believes that “helicopter money” would “rip huge holes in central bank balance sheets” and leave governments and taxpayers to “pay the bill in the end.”
In addition, legally, the ECB is prohibited from financing states and lacks a single treasury to work with while the Fed is restricted in which assets it can buy.
Still, if zero or negative interest rates fail to stir consumer prices and the Fed's attempts to normalize monetary policy are not proving effective, dropping manna from heaven may not be such a bad idea.