In the Search for Global Growth, “Helicopter Money” May be on the Launchpad
By Anne Vandenabeele
Capital Group Economist
Central banks around the world have tried a series of increasingly unconventional strategies in recent years to jump-start their economies. First, they slashed interest rates. Then they implemented quantitative easing. Several countries even dropped rates into negative territory. But those moves have yet to generate the kind of sustained growth that policymakers expected. Though the U.S. has regained its stride with clear improvements in jobs and housing, the expansion has been ragged and unpredictable in Japan and much of Europe. The absence of a broad-based recovery is now spurring talk of yet another unorthodox move — printing money to effectively distribute to citizens.
Under this policy, a central bank creates new money, which the federal government then uses to boost spending or cut taxes. The newly minted funds could even be passed on directly to citizens through tax rebate checks or other maneuvers. This idea is often referred to as “helicopter money” because it conveys the image of cash being showered from the sky to an eager populace below. The goal is to provide a potent economic jolt capable of sparking a lasting recovery. However, helicopter money entails significant risks, including the threat of unbridled inflation. For that reason and others, it’s doubtful the U.S. would go this route. But it’s possible that Japan could attempt it in some form and that Europe might consider it down the line.
For investors, the effects would depend on the exact measures undertaken and how they were carried out. Initially, the uncertainty surrounding any stimulus effort could weigh on stock prices. But equities might gain in the medium term from the reflationary boost, and in the long run if new spending stoked economic growth and corporate earnings. Helicopter money would likely help some industries and strain others. Construction companies and machinery makers might benefit if public infrastructure spending was increased. Retail and services could be bolstered by a rise in consumer activity. In addition, interest rates would likely decline in the U.S. if foreign investors in countries subject to helicopter money were drawn to the perceived safety and higher yields of Treasury bonds. That would put more pressure on global banks, which have been hampered by persistently low interest rates. Finally, currencies would likely adjust as well, depreciating in those countries where helicopter money promoted growth and inflation.
Helicopter money can provide a quick economic boost.
Helicopter money — a term coined by Milton Friedman in 1969 — is considered a way for a government to revive a faltering economy without resorting to excessive borrowing in debt markets. Former Federal Reserve chairman Ben Bernanke once espoused the use of helicopter money as a potential remedy for Japan’s years-long malaise. Despite countless steps by Japan to resuscitate its economy, the country continues to struggle with uneven growth and very low inflation. Conditions are better in Europe, but economic activity in the eurozone has only recently returned to its level prior to the 2008 global financial crisis.
In recent years, global stimulus efforts have revolved around monetary policy — specifically, the lowering of interest rates to spur borrowing. The U.S., Europe and Japan have all employed forms of quantitative easing, in which central banks purchase government bonds to push rates to rock-bottom levels. But that has not been a cure-all, in part because consumers and businesses are reluctant to take on more debt while economic conditions are weak. Helicopter money, by contrast, is a form of fiscal stimulus. It raises government deficit spending but doesn’t require central banks to tinker with rates or the public to take out loans.
Helicopter money, also known as monetary finance or debt monetization, is intended in part to boost inflation, which has been chronically low in Japan and Europe. Though rampant inflation can harm an economy, falling prices can be even more corrosive and hard to reverse because they prompt consumers to delay purchases in the hope that goods will be cheaper in the future. But those sagging prices can bring on a spiral of job cuts that further erode consumer spending. To some degree, both Japan and Europe have experienced periods of deflation in the past few years.
The use of helicopter money entails a number of risks.
If everything went right, helicopter money could indeed spark growth. And if the cash was put to use on public infrastructure projects it might even boost productivity. But debt monetization has a big downside, starting with the risk of a spike in consumer prices that couldn’t easily be tamed. Even under the best conditions, it’s difficult for policymakers to come up with the right level of stimulus that nurtures growth without overheating the economy. That task would be made more difficult by the fact that helicopter money is based on the promise that the central bank will never take it out of circulation. In other words, the trade-off for improved growth in the short run is a reduced ability to combat inflation in the future.
There are other obstacles, including the risk of investors getting spooked. Even if inflation was under control at a given moment, investors still might lose confidence in the central bank’s ability to control it over the long haul. History doesn’t offer much cause for optimism. Helicopter-like policies have been employed only a handful of times, but several resulted in bouts of hyperinflation, including Zimbabwe in the 1990s and Argentina more recently. These are extreme versions of the more moderate and controlled policy options advocated by proponents of helicopter money, but this subtle equilibrium may be difficult to maintain in practice.
There’s also the issue of central bank independence. Helicopter money requires central banks and government officials to coordinate policy, but that could backfire in the long run by injecting politics into a previously nonpartisan process. And initial success could tempt governments to keep using deficit financing to sustain activity indefinitely.
Regardless of the downside, Japan may attempt some version of debt monetization. The country has used unconventional measures in the past, including direct cash transfers. In 1999, it handed out shopping vouchers to about one-quarter of its population. The impact was negligible, but Prime Minister Shinzo Abe may decide that helicopter tactics are worth a shot given Japan’s stubborn underperformance. For example, the government could unveil a large infrastructure project for the 2020 Olympics. It’s also possible that the United Kingdom and Europe may try versions of debt monetization if their economies continue to struggle. The use of helicopter money underscores the lengths to which central banks will go to reach their inflation targets. Though this measure is far from ideal, some may find it preferable to the economic doldrums they’ve been living with.
Anne Vandenabeele is an economist and fixed-income analyst. Based in Los Angeles, she has 15 years of investment experience and has been with Capital Group since 2000.