Building a Ghost City Out of Helicopter Money
There has been a lot of talk about helicopter money lately.
Last May, Janus Capital’s Bill Gross said structural changes currently occurring in the US economy will ultimately lead the Federal Reserve to adopt this extreme form of monetary policy. Last week, Federal Reserve Bank of Cleveland president Loretta Mester revealed helicopter money is indeed a possibility during an interview on ABC’s AM program:
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.”
Japanese officials have been seriously considering helicopter money. It now appears they won’t go all the way, but according to a Reuters report, Japan may try a “soft” form of helicopter money:
Japanese policymakers, who won’t go as far as funding government spending through direct debt monetization, might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, say sources familiar with the matter. In the past week, Japanese markets have seen hyped-up speculation that the government will resort to using what’s called ‘helicopter money,’ where a central bank directly finances budget stimulus through programs such as perpetual bonds.”
While Japan appears to have backed off from the prospect of dropping helicopter money for the time being, it seems clear this monetary policy is in the future as central banks become more desperate, reaching for more extreme measures as the “conventional” approaches of lowering interest rates and quantitative easing fail to produce desired results.
So what exactly is helicopter money?
Obviously, government officials won’t literally drop money from the sky. The term was coined by Milton Friedman in his paper The Optimum Quantity of Money:
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.”
An article in the World Economic forum explains the basic principle of helicopter money:
If a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target.”
In a nutshell, the central bank injects newly created money directly into the economy, bypassing banks and other financial institutions. The central bank buys bonds directly from the government to finance infrastructure, to “fund” tax cuts, or even to send checks directly to citizens.
Charles Hugh Smith explained how helicopter money works in an article on OfTwoMinds.com:
To avoid all the problems of ever-rising debt in a stagnating economy, the central bank creates money out of thin air and buys the government bonds with the newly created money. This is called monetizing the debt as new money is created out of thin to buy the debt. No tax revenues are needed, and so no sacrifices must be made to accumulate more debt. All the helicopter money is in effect free money because nobody has to pay anything for it. Monetizing helicopter money is like a perpetual motion machine: it’s a magical machine for creating free money the government can spend any way it likes.”
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In essence, helicopter money is quantitative easing on steroids. In fact, David Stockman says there really isn’t a significant difference:
The only thing different technically about ‘helicopter money’ policy is the suggestion by Bernanke and others that the treasury bonds could be issued directly to the Fed. That would just circumvent the dwell time in dealer (or ‘investor’) inventories but result in exactly the same end state. In that event, of course, Wall Street wouldn’t get the skim.”
The insidious thing about policy of helicopter money is that it puts the central bank in direct cahoots with the government. Suddenly, unaccountable central bankers have a say in how much debt the government runs up and how that money is spent. This will undoubtedly lead to an even faster piling up of debt – as if the government needs any help in that department. Stockman called it loathsome:
The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts. They would do this by agreeing to generate incremental fiscal deficits—-as if Uncle Sam’s current $19 trillion isn’t enough debt—–which would be matched dollar for dollar by an increase in the Fed’s bond-buying or monetization rate. That amounts not only to teaching children how to play with matches; it’s tantamount to setting fiscal forest fires across the land.”
Helicopter money is a higher dose of heroin for an addict becoming increasingly resistant to its favorite drug – monetary stimulus. First the central banks cut interest rates to super low levels. Then they went with quantitative easing. Next we saw negative interest rates. And yet the central planners are still struggling to keep the bubbles inflated. Next will come the helicopter money.
And then what?
Smith said it will create a ghost city:
The assumption here is that helicopter money will trigger a virtuous cycle of growth in stagnating economies: once this tide of new money washes over the economy, people will spend, spend, spend, entrepreneurs will start new business, corporations will expand production and this new expansion of activity will enable the state/central bank to withdraw the helicopter money. The problem with helicopter money is what I call the Ghost City Syndrome: helicopter money floods into a barren landscape and constructs a new city from scratch. The idea here is that the new city will magically attract residents, entrepreneurs, etc. But once the helicopter money is gone, economic activity drops to near-zero. The new city is a Ghost City: helicopter money did not launch a self-sustaining wave of new activity.”