What is Helicopter Money?

What is Helicopter Money ? Why the Central bankers are using the term so frequently now?blog

The instant reference that can be drawn towards the Hollywood/Bollywood, kind of Robbin hood stories where the hero/villain throws money from the helicopter in the villages. Jokes apart

Getting back to economics “Helicopter money” is the term economists and market-watchers use for an aggressive form of monetary stimulus — the government’s power to print money — to try to spur growth and get inflation higher. There had been buzz that the Bank of Japan could move in that direction, but it elected to take only a smaller action. The bank did say it would do a “comprehensive review” of policy in the months to come that could presage more coordination between the bank and the Japanese government.

It is an idea based on a metaphor used by the renowned economist Milton Friedman nearly five decades ago and given new life in this century by Ben Bernanke. It is also a policy that has echoes of some of the great catastrophes of economic history

The Bank of Japan, for example, has pledged to do whatever it takes to get inflation up to its 2 percent target. It has bought a trillion or so yen in assets to try to make it happen, but instead a key price measure fell 0.4 percent in the year ended in May.

The question now is whether some form of helicopter money is the next step in trying to achieve that goal.

So would a central bank really drop money out of a helicopter?

No! It’s a metaphor.

As Ben Bernanke famously argued in a 2002 speech, when he was a Fed governor, if a central bank created money out of thin air and gave it to the government, and the government cut taxes or mailed a check to every citizen, it would on substantive grounds amount to the same thing as Mr. Friedman’s mythical helicopter drop.

(Mr. Bernanke ignored a Fed press officer’s recommendation that he not use the “helicopter” reference in the speech, according to his memoir, for fear it would seem too flippant. Sure enough, it earned him the nickname Helicopter Ben from his critics. This is a prime example of why central bankers so rarely use colourful language).

But how is that different from what the central banks have been doing for years now with their quantitative easing policies?

There’s a crucial difference. The Q.E. policies have indeed consisted of central banks using money created from thin air to buy government bonds. That is, in effect, printing money to fund government deficits.

Quantitative easing is akin to your rich uncle making you a loan under favourable terms, but making it clear you’ll have to make interest payments and then pay the money back one day. Helicopter money is what happens if your rich uncle makes you a “loan,” but says that you don’t have to pay any interest and never have to pay it back. For practical purposes it’s more gift than loan, whatever the bookkeeping technically says.

And just as you’re more likely to spend the money your uncle gives you with abandon in the second situation than in the first, so a government will be more likely to spread money around.

Helicopter Money is potentially risky, and there are some technical complications to carrying it out.

Printing money from thin air to fund government spending doesn’t have a sterling history. It is what happened in Weimar Germany in the early 1920s, when hyperinflation ran rampant. It is what happened in Zimbabwe in the first part of this century. And it is happening in Venezuela right now.

These examples show how easily things can spiral out of control when a government finances itself using its ability to create money. After all, when money-printing boosts inflation, it tends to also increase interest rates and hence borrowing costs. Then, the government may need yet more newly printed money to fund itself the next year, and so on.

Let’s See Japan Central bank uses it or not – and It will be carefully watched by the ECB, FED and Central banks around the world , Not to forget that RBI Governor Rahguram Rajan has already criticised the use of Helicopter money.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s