Will Helicopter Money Fly?

Summary

Like the thrumming of an approaching helicopter the talk from official and unofficial central bank spokesmen about giving money directly to consumers to jumpstart economic growth is growing louder.  Former Federal Reserve Chairman Ben Bernanke said in Japan that deflation could return at any time and that ‘helicopter money’ was the strongest tool to overcome deflation. 
 
The President of the Cleveland Fed Loretta Mester said in an interview on ABC, “We’re always assessing tools that we could use. In the US we’ve done quantitative easing and I think that’s proven to be useful. So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.”
 
The usefulness of helicopter money is based on a single assumption. If the government gives people money, they will go out and spend it, initiating inflation and hopefully the ‘virtuous cycle’ of spending, production, hiring and wage increases.  But what if people respond to ‘free money’ as they have to zero interest rates?  They do not spend but save, more concerned about replacing the missing interest income than splurging on consumption.
 
Can ‘free money’ achieve what falling gasoline prices, low interest rates, zero interest rates and negative interest rates have failed to do? What are the dangers from such a radical approach to monetary policy?  Is the confident banker talk just the brave front of an economic theory without tether in the real world?
 
Join us for a trip to the twilight world of post-modern monetary policy.

Joseph Trevisani began his twenty-five year career in the financial markets at Credit Suisse in New York and Singapore where he worked for 12 years as an interbank currency trader and trading desk manager. Returning from Asia he moved to Bermuda and managed the Asian Trading desk and...