The argument that the introduction of helicopter money — whereby people are directly given money by central banks to stimulate the economy — would allow governments across the planet to engage in more expansionary fiscal policy is flawed, according to new research from Barclays.
Writing in a new note titled “Helicopter money and the fiscal frontier” — Barclays’ macro researcher Michael Gavin says that a move away from financing fiscal spending with government bonds, and towards so-called monetary financing (the technically correct term for helicopter money) simply would not work.
The crux of Barclays’ argument is that monetary financing is unlikely to be substantially cheaper than bond financing, and as a result, its introduction would be pretty pointless. Here is the key paragraph from Gavin at Barclays (emphasis ours):
“We take issue with the idea that monetary finance of governments would facilitate a more expansionary fiscal program than would be achievable with bond finance. Under circumstances that confront the low-inflation economies for which helicopter money is sometimes advocated, bond finance is not appreciably more expensive than monetary finance, and by some measures bonds are even cheaper. If monetary finance is not cheaper than debt, it is hard to understand why making monetary finance available to a sovereign would promote a more expansionary fiscal stance.”
Gavin adds later in the note (emphasis ours):
“No major economy is today constrained in its ability to access the debt finance needed to finance its fiscal program. The view that monetary finance would facilitate more expansionary fiscal must therefore be based on a presumption that it is meaningfully less expensive than debt finance. However, in Japan and core Europe [the two regions most associated with the prospect of helicopter money], it is hard to argue that this is the case.”
The term helicopter money was first coined by American economist Milton Friedman in the 1960s. The basic principle is that central banks create new cash and give it directly to people to spend on whatever they want.
Here is the quote from Friedman that coined the phrase:
“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.”
For decades, helicopter money has remained as more of a thought experiment than a viable policy. But, with negative rates and chronic low growth confounding central banks, the idea started to pick up credibility in the middle part of 2016, especially after rumours that the Bank of Japan was considering some sort of experiment with helicopter money in the summer.
Increasing inflation expectations, along with sell off in the global bond markets in recent weeks, have dampened thoughts that helicopter money could be imminent, but advocates remain.
Gavin’s argument puts another black mark against the cause of helicopter money. In October, research from Dutch bank ING suggested that helicopter money wouldn’t work because most people would not spend the cash given to them. When the idea was first gaining traction earlier in 2016, HSBC strategists led by Fredrik Nerbrand argued that it would be “unlikely to provide much lift in terms of real growth just like negative policy rates.”
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