Have central banks run out of ammo to salvage economic growth? After Quantitative Easing (QE) and negative interest rates produced little impact in Europe and Japan (so far), some may wonder if dropping cash from helicopters could be an option to stoke spending and demand! This may seem silly (it is), but its essence should not be dismissed altogether.<\/p>\n
The idea of \u201chelicopter money\u201d was considered in 1969 when Milton Friedman mused: \u201cLet 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 happen again<\/em>.\u201d An interesting notion, right?<\/p>\n A real-world, present-day version might sound like this: a central government sells non-interest bearing and irredeemable bonds to the central bank which will pay with newly minted money. The government would use the proceeds to expand spending (through tax cuts or increases in fiscal expenditure), which should push up prices.<\/p>\n \u201cFree-debt\u201d<\/strong><\/p>\n Since the \u201chelicopter money\u201d framework apparently removes debt repayments for the government, citizens concerned about having to foot the bill via additional taxes are satisfied. This is particularly relevant for Europe, where slowdown is rooted in sovereign debt (a notable issue there).<\/p>\n Additionally, expansionary monetary policies in economies like Japan have lowered interest rates, but have not driven the desired outcomes \u2013 households are not confident enough to increase spending\/invest in riskier assets and\/or banks may be reluctant to lend in light of flattish yield curves and low interest margins. Monetizing the deficit, on the other hand, directly thrusts money into people\u2019s hands, limiting the intermediary role of banks and giving consumers an added incentive to spend.<\/p>\n No Room for Reversal<\/strong><\/p>\n What sets \u201chelicopter money\u201d apart from measures like QE is that monetization of a government deficit would essentially be a one-off infusion of fresh money that would not allow for a \u201cu-turn\u201d (from policy reversal). This can potentially create higher inflation expectations and lift long-term interest rates, not necessarily a bad thing.<\/p>\n Will It Work in Real-World?<\/strong><\/p>\n As long as people spend the extra cash, nominal aggregate demand will get a boost either through a rise in prices or expansion in output, or both. However, there are chances that many people, still doubtful about their economy\u2019s prospects, would consider it prudent to save the cash for the future instead of spending it instantly. Fear over Europe\u2019s future may have created an environment where savers outnumber borrowers (which has long been the case in Japan).<\/p>\n Perhaps, a more viable use for \u201chelicopter money\u201d would be governments spending the newly printed money on investment projects in areas like transportation, education and healthcare. Such expenditures could support employment and productivity and create a positive outlook for sustainable growth. The problem with Europe today is that, given the sovereign debt crises in several member countries, additional fiscal spending runs contrary to the solutions for bringing member nations back into good standing in the capital markets. In this sense, the economic possibilities of \u201chelicopter money\u201d may never see the light of day simply because of the political implications.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n While the concept of \u201chelicopter money\u201d may look interesting, and perhaps even promising on paper, it would have to overcome real challenges (political and structural) before it could succeed in resuscitating economies. The idea of monetary policy drifting into the realm of fiscal policy is seen as a \u2018no-no\u2019 and probably for good reason. If allowed some time, monetized government spending might have a chance to extricate economies from deflationary spirals, but it\u2019s not likely in this business cycle that we will get a case study on the possibility.<\/p>\n While we’re taking a closer look at how central banks can restore economic growth, at Zacks Investment Management, we are always looking just as closely at U.S. economic data. For in-depth investing perspective, download our just-released Economic Outlook report (April ’16 edition) by clicking below…<\/p>\n \n","protected":false},"excerpt":{"rendered":" Have central banks run out of ammo to salvage economic growth? 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