Helicopter Money
Today’s post looks at helicopter money.
Helicopter money
This post is the second in a series of three:
- Last time, we looked at whether and why inflation has gone away
- In this article, we’ll look at helicopter money
- In the final article, we’ll examine modern monetary theory (MMT)
Helicopter money is a version of bond purchases, money is directly transferred into the accounts of consumers for them to spend in the real economy.
- In the original version – proposed by Milton Friedman in 1968 as a theoretical one-off tool against deflation – banknotes would be printed and dropped from helicopters.
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.
More recently, direct transfers of electronic money to bank accounts have been preferred.
- Other versions of the plan include (temporary) tax cuts.
Another version of the plan would impose some kind of time limitation on the validity of the credits, in the same way that many gift and reward cards start to self-destruct (usually through a monthly charge) after a few months’ grace period.
What’s wrong with QE?
The main problem is that it doesn’t seem to work.
- The central banks but bonds from regular banks, and these banks, in turn, should lend money to the private sector to fund investment in new enterprises and hence growth.
But it’s possible that the underlying problem is not a shortage of credit, but a lack of demand.
- This makes asset prices.
Austrian Economists would argue that there is no such thing as a lack of demand.
- The primary function of prices is to ration output against an insatiable desire to consume.
Or as Ricardo put it in 1820:
Men err in their production; there is no deficiency of demand.
A second problem for What about MMT?
A further elaboration of bond-buying of So what’s stopping HM?
The uncontrolled use of printing presses has a chequered history. The optimists – which for once include me – would argue that the first two were MMT and the last two were helicopter money. Against that, the current record low inflation and interest rate environment does provide a good buffer against which to experiment with HM. But the risk remains that if a helicopter drop is successful, a precedent is set that money can be created in that way. We also need to work out a way of encouraging people to spend the money they receive. Ironically, the permanency of MMT would be likely to mean that people would expect inflation and would bring forward their purchases to take advantage of current lower prices. Economist Frances Coppola published a book earlier this year called “The Case for People’s Quantitative Easing”. Over the summer, the book was chosen by John Authers for his book club on Bloomberg. So let’s see what she has to say. Coppola’s position is that
In 2008 we propped up the financial system and bailed out corporations but what we It seems Coppola is a fan of both HM (as I define it) and MMT – she’d like to see a sovereign wealth fund and a public investment bank. A one-off helicopter drop designed to bring the economy out of a slump doesn’t necessarily need to mean that people will lose all faith in the currency. The whole point is to raise inflation because we’re trying to increase aggregate demand. She is also against true central bank independence, arguing that bank monetary policy must dovetail with fiscal policy (from a “responsible” government). I don’t really think there is any such thing as a fully independent central bank. And of course, she sees fighting inequality as central to all public sector activity. Twitter, Pinterest, LinkedIn, Tumblr, Reddit, StumbleUpon and WhatsApp. Article credit to: https://the7circles.uk/helicopter-money/
Coppola
didn’t do was give ordinary people spending money.
Conclusions