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In recent years, the ECB has mainly been concerned with stimulating the economy. Not only government bonds, but also corporate bonds were bought on a large scale. This brought interest rates into line and with those low interest rates, the ECB tried to stimulate the economy. With inflation high, the ECB increases Interest rates are steadily rising and the period in which the central bank stimulates seems to be over for the time being. But what if the ECB decides to pursue expansionary monetary policy again in the future, for example when inflation has fallen again? Wouldn't it be better for the ECB to do this in a different way? Could the ECB also transfer the money directly to the people or the government, instead of endlessly buying government bonds?
Helicopter money
The idea of creating money and providing it directly to people to get out of a crisis is not new. The well-known economist Milton Friedman imagined a situation in which a helicopter flies over the city, emptying buckets of money above the streets. In the crisis of the 1930s, the money supply shrank by a third in less than three years, leaving many countries facing deflation. The shrinking money supply not only led to the development of the Chicago Plan, in which the deposit bank is proposed, it also led to a new monetary idea; Providing new money directly to people to boost spending.
According to Friedman, if money is distributed to the population, it leads directly to economic growth. People who get wind of the helicopters rush out to pick up as much money as possible. Immediately, sellers rush to the people who now have money to spend to offer their stuff. Today, new money can easily be deposited into bank accounts, after which people can go directly to the MediaMarkt or the Footlocker to buy products. Retailers anticipate more demand for goods and produce more, they hire more people and that results in economic growth.
The decline of the money supply (M2) in America in the 1930s (source; David Henderson)
With this example, Friedman was trying to make the point that central banks can go to great lengths to fight deflation. For a long time, however, this proposal remained purely theoretical, until Ben Bernanke, former chairman of the FED, discussed helicopter money as a possible option during a Speech in 2002. This gave him the nickname 'Helicopter Ben'. In 2016 he again indicated that helicopter money should not be ignored and that it is a good possibility in certain circumstances. During the corona crisis, helicopter money is actually reality when the U.S. government made $500 billion in checks and wire transfers available directly to people. The amount was 1000 to 1500 dollars per person and depended on income and family composition. The government had to borrow this money, but at the same time the Fed was actively buying government bonds.
Still, you may wonder whether the corona crisis was the right combination of circumstances to use helicopter money. The corona crisis was based on a different basis than other crises, as the economy suffered from corona measures. It wasn't a crisis that stemmed from a lack of demand for products. Extra money in the economy in the form of helicopter money therefore did not make much sense and could even be counterproductive, Thomas Bollen wroteFollow the Money. Central banks did increase the amount of money worldwide, but that was by means of quantitative easing (buying government bonds) and was mainly intended to create good financing opportunities. The point of criticism is therefore often that this created money has not really ended up with the people, but has mainly remained in financial markets. As a result, it pushed up prices of assets such as houses and stocks, but it did not turn out to be the cure that was hoped for. Quantitative easing did not directly bring more money into the real economy, but low interest rates did make it more attractive to borrow. Low interest rates also justified higher valuations of equities, bonds and real estate.
Different forms of helicopter money
Helicopter money does end up in the real economy. This can be done in a number of ways. For example, the central bank can create money, after which the government distributes it to the population by depositing it in citizens' accounts. It is important that people see this money as a one-time bonus and not as a tax incentive that is later reversed by higher taxes. Should the Central Bank Digital Currency where people can open their own accounts with the central bank, the central bank can also distribute money itself, but that is not yet possible. The government can also choose to encourage long-term investment by focusing more on companies when distributing the money. In such a case, the government provides support for certain investments that companies make, but such a choice also depends on the reason why helicopter money could be used.
In addition, the central bank can simply 'print' money, which is then issued by the government. This is called monetary financing. In such a scenario, money is not given directly to residents, but to the government. With this money, the government can then build roads and schools, invest in health care and police, or make other expenditures. The money that is created with this then ends up entirely in the economy, while helicopter money can also be used to save or to pay off debts. All this is done without increasing the national debt, because the money does not have to be repaid.
Finally, you can also choose to write off a whole mountain of debts. The Dutch national debt is relatively low, but our private debt, on the other hand, is high. Helicopter money could reduce this debt burden on a one-off basis to support households. The Australian Economist Steve Keen has long been an advocate of a so-called Debt jubilee. According to Keen, our entire economy is completely characterized by debt and by taking on new debt. In the event that no new debt is contracted, the economy also sinks into recession, as was the case in Spain in the years after 2008. House prices and new credit are also strongly correlated. According to the Australian, we are now at a dead end and the only way out of this situation is to cancel debts. Perhaps helicopter money could therefore also be used to reduce the debt burden.
Dutch private debt compared to the eurozone average (source; Rabo Research)
Wim Boonstra and Bas van Geffen, economists at Rabobank, argue for a disguised form of writing off government debt, since a quarter of all government debt has already been bought by the central banks. By converting purchased debt into perpetual and interest-free loans, the financial markets would become healthier again. "It has become a vest-pocket-trouser-pocket transaction," they recently told Het Financieele Dagblad.
Criticism
Not everyone is keen on helicopter money. For example, helicopter money removes the strict separation between the central bank and the government, as this plan requires cooperation between the two parties. The blurring of that line could lead to Kafkaesque practices if strict rules are not drawn up. For example, hyperinflation is often preceded by a period in which the government creates a lot of money. This was not only the case in Germany in the 1920s, but also in Zimbabwe and Venezuela. Proponents of helicopter money often say that hyperinflation only occurs when there is also political unrest. Yet governments often find it difficult to resist gaining popularity through the central bank when there is no separation. For example, the interest rates of countries where the central bank was not strictly segregated often wentdown around election time, purely to win votes.
There has also been criticism of the alleged effectiveness of helicopter money. It is very likely that helicopter money is much less effective than monetary financing of government spending, as helicopter money is unlikely to be fully spent. In addition, there is the fear that the new money will cause higher inflation, after which measures will have to be taken if inflation rises. After all, the money supply rises much faster than the amount of products and services in the economy. The scarcity in the real economy then leads to higher prices.
Of course, the criticism of helicopter money is also a matter of principle. The excessive money creation is the hallmark of our elastic money system, in which money is not linked to, for example, gold, silver, crypto or commodities. The money creation works fluctuations of Business Cycles in the hand, which means that times of very strong growth are followed by strong corrections. In economic prosperity, there is a huge demand for credit, resulting in hard economic growth. If confidence then plummets, the demand for credit decreases and this in turn leads to malaise. A hard money system will be subject to far fewer fluctuations and will produce much more even growth, because money creation is more stable.
At the same time, there is something to be said for helicopter money being a fairer alternative to QE. If there were to be stimulus, would it not be better and fairer to ensure that the money goes to the people and not to the banks that have made a mess of it? Also, house prices will not rise as fast due to helicopter money, while QE does cause bubbles. Finally, helicopter money is also very effective against deflation, because household and business spending is maintained. However, strict regulations are of vital importance, because free money can also have disastrous consequences. In any case, helicopter money is an interesting concept and definitely worth some further research.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
