Central Banks Might Just Crazy Enough for Helicopter Money

Central banks around the world have a common problem. They are failures. For the past eight years, central bankers worked tirelessly to generate economic activity. They pushed interest rates below zero and printed trillions of dollars.

And yet, the IMF recently cut its global growth forecast again.

Most economies are stuck in neutral while threats such as the debt crisis in Europe and deflation in Japan keep growing. Now central bankers are talking about a new tool – helicopter cash (free money distributed by a government agency). It won’t work either, but don’t expect that to stop the bankers from trying!

Milton Friedman: “Let 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 be repeated.”

If sort-of free money drove economic growth and inflation, Japan would be on fire. In 1999, government officials created a plan to distribute $6 billion free to qualifying families and the elderly. Averaging about $170 in coupons, residents received coupons that they could spend at local establishments for goods and services, but not cash.

The program provided a brief economic bump, but quickly faded. The problem was that no one expected the free money to keep flowing. It was “once-and-done.”

We tried the same thing in the U.S.

In 2008, President Bush, working with a Democratic Congress, gave qualifying Americans a tax rebate capped at $600 per person, or $1,200 per household. The money flowed during the spring and early summer, and then the economy plummeted.

I’m not suggesting the small program in Japan, and certainly not the tiny tax rebate in the U.S., could have altered the course of economic history. The problems back then were simply too big to address with small amounts of cash distributed among millions of people. The same is true today.

Originally used by Friedman to show the effects of monetary policy on inflation and the costs of holding money, helicopter money is now discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing.

The Japanese population is dying off. Companies keep older workers employed even when there is no work, which stifles upward mobility and kills productivity. European countries have a host of problems, including aging populations, rigid workforce rules, and banks loaded with non-performing loans.

The U.S. is in better shape than most, but we are in the worst economic season. The older generation, which has the money and the best jobs, wants to save for retirement. The younger generation wants to spend, but doesn’t have the cash.

A dose of free money will solve none of these issues. But that doesn’t mean such programs would not have an effect.

Taxpayer funds provided the kick in Japan in 1999 and the U.S. in 2008, so the cash programs implemented by the governments weren’t truly “helicopter money.” Today, the discussed programs would come from the central banks, either directly… or indirectly.

This small difference would have huge consequences, not because of the immediate effects, but because of how it would change perceptions.

Currently central banks still have a modicum of credibility, at least when it comes to maintaining the value of their currency. Their logic might be tortured, like in the Eurozone, but they’ve shied away from printing money simply to prop up governments or support populations.

This frayed but resilient thread keeps up the illusion that money remains scarce, and therefore has value. Once central bankers cut that thread, there’s no limitation on how far they can go in their efforts to drive economic change.

If a $20 billion plan in Japan, or $200 billion plan in the U.S. or Europe, doesn’t do the trick, what would the bankers do next? Admit that their logic was flawed and look for another way to address their problems, or double down… then triple down… then, well, you get the picture.

From around 2012 onward, some economists began advocating variants of helicopter drops, including ‘QE for the people’, and a ‘debt jubilee’ financed with the monetary base.

Citizens, investors, or anyone else tied to a currency subject to a helicopter-money program would instantly be fearful of serial cash printing and giveaways, and therefore long-term devaluation of their holdings.

The prudent move would be to exit the currency as quickly as possible. That might sound wonderful to a country like Japan, or even the U.S., where weaker currencies and inflation pressures would be welcome, but too much of anything is poisonous. There is no way to put the free-money genie back in the bottle. No one in their right mind would trust central bankers to self-regulate or admit failure.

In this sense, helicopter money is the nuclear option. It is without precedent in developed nations, has had disastrous effects in smaller economies when used to prop up governments, and there is no way to curb such programs once they begin.

So far, officials in Japan and elsewhere claim they aren’t seriously considering such moves. But that’s what they said about negative interest rates in years past. Let’s hope for our own sake that this time around they stick to their word.