Investment Strategy Bulletin
COULD MONEY FLY?
What is helicopter money ? The concept of “helicopter money” is increasingly presented as the next step in efforts to stimulate economic recovery in demand-deficient economies such as Japan or the Eurozone. While the idea sounded overly unorthodox a few years ago, it is now a regular part of policy debates.
With major central banks such as the Bank of Japan and the European Central Bank struggling to boost inflation expectations despite an ever-broadening range of policy measures, respected actors like Ben Bernanke are giving the idea some serious attention. The helicopter money concept suggests that policymakers, if willing to be creative enough, would not run out of options to stimulate demand in a depressed economy because they could print money and hand it to the population (symbolically dropped from helicopters) to stimulate spending. Realistically, helicopter money operations would take a more indirect process (and no helicopters), in the form of central bank-financed government spending.
COULD THIS REALLY WORK?
The idea is not as unreasonable as the name sounds. As a policy measure, it has some important advantages. By combining monetary and fiscal aspects, it can have an impact on many fronts, boosting spending and income while also helping to raise growth and inflation expectations.
Standard policy tools seem incapable of bringing about such results at the moment. A traditional debt-financed fiscal stimulus, despite the clear benefits it may offer, has become very unlikely in an era of high debt burdens in most advanced economies. And while much more is being done on the monetary front, central bank actions are coming up against diminishing returns. Economies respond to interest rates cuts with ever less enthusiasm. In fact when the BoJ cut rates into negative territory last January, the market reacted negatively. Other, less conventional, tools also face skepticism from both markets and the general public.
But helicopter money may offer an ingenious way out of some of these problems. It could bring extra public spending without raising government debt. And it could be a much more direct form of stimulus than other measures tried so far. A criticism of Quantitative Easing is its limited effectiveness: central banks buy assets with newly-printed money, but if these funds remain in the form of bank reserves, there are few benefits to the real economy; growth and inflation expectations don’t increase much. Printing money to directly fund government initiatives may offer a way around this problem.
COULD IT REALLY HAPPEN?
The evolution of the policy landscape throughout the post-crisis period should teach a lesson in humility to analysts too quick to discount the idea of unprecedented measures. Negative rates sounded inconceivable some years ago, but are now seen as an almost conventional policy tool. When the ECB cut its deposit rate into even deeper negative territory last March (from -0.30% to a new low of -0.40%), most market participants treated this as an entirely expected development.
So the “unorthodox” nature of an approach is clearly not enough to discount it as a possible outcome. Still, we find that given the dynamics currently at play, the probability of seeing helicopter money in action in the near future remains fairly remote. It would require an unusual degree of cooperation between fiscal and monetary policymakers, which implies central banks’ willingness to see their hard-earned and much-prized independence undermined. It would also involve expanding central bank balance sheets further, which in some constituencies may reach their effective limit. The Swiss National Bank case reminds us of this constraint. At the same time, political opposition may be an important limitation, given the concern that after enjoying ‘free money’ once, governments may see no reason to show fiscal discipline in the future.
Governments have been reluctant to use fairly conventional fiscal stimulus - even at a time of sub-zero interest rates and clear infrastructure investment needs. Instead of showing increased support for aggressive central bank action (a prerequisite for bold plans like helicopter money operations), many jurisdictions are travelling in the opposite direction. Political actors (and even some central bank board members) have been increasingly critical of previous central bank decisions. Strong German opposition to issues like negative rates and ECB QE is a case in point. It is also an indication that the Eurozone seems to be more constrained in this respect than Japan, given the complications around fiscal and monetary policy in a currency union.
Instead, the world may have to live with only marginally more constructive fiscal policy in the near future. While not a major driver of economic recovery, it is worth noting that fiscal policy in major economies is no longer a drag – and is turning supportive in several cases. In China, the central government has decided to allow the budget deficit to widen in order to support its slowing economy. In the Eurozone the austerity era is mostly gone and with debt service costs falling as QE keeps pushing yields lower, governments have gained some fiscal leeway. State and federal budgets in the US have also turned a touch expansionary after acting as a contractionary economic force for several years. And the predominant expectation for Japan is now that the government will postpone the tax hike scheduled for next year, and will announce a fiscal stimulus plan, most likely in the next few days. This may not be anywhere close to what is needed for the world economy to take off, but it might be just enough support to prevent hard landings.
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