When Mario Draghi got out the bazooka in March, the ECB president hoped that the bank’s programme of renewed rate cuts and increased bond buying would finally be the driver to growth and inflation across the continent.
Four weeks later, and its doesn’t immediately look like much has changed. Latest PMI data from the eurozone was unspectacular, and all indicators seem to suggest that there’s no big economic growth coming any time soon.
More and more voices are arguing that central banks across the globe have run out of ammunition. That’s not something Draghi subscribes to and on Thursday he told a panel in Portugal that the ECB “has no shortage of tools available” to combat persistently sluggish growth and inflation.
Still, the perceived failure of negative rates has brought about calls for the introduction of so-called helicopter money — which involves creating new money and giving it directly to people to spend on whatever they want. Analysts from HSBC actually argued earlier this week that “the helicopters are already out in Europe.”
The American economist Milton Friedman first proposed the idea of helicopter money in 1969 in a paper called The Optimum Quantity of Money.
Here’s 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.
But there’s one pretty big problem with helicopter money: It’s not necessarily going to work, according to one set of strategists from HSBC.
In its “The Allocator” note, strategists from the bank led by Fredrik Nerbrand, put forward the suggestion that even if central banks across the globe do resort to introducing helicopter money, there’s no guarantee that increased growth will follow. Here’s the quote (emphasis ours):
Central banks are grasping for new tools for emergency rescue operations. Recently, helicopter money is becoming an increasingly popular tool as it is perceived as an easily implemented solution to offset any cyclical weakness. Unfortunately, it is unlikely to provide much lift in terms of real growth just like negative policy rates.
Later in the note, HSBC adds:
While the concept of helicopter money features increasingly often in client meetings such policies are unlikely to limit a significant cyclical downturn.
The downbeat verdict on helicopter money is just a few lines in a much larger report on asset allocation, so unfortunately HSBC don’t set out why they don’t think it will work.
But it’s interesting to see such a large bank pour cold water on a mechanism that many are touting as the emergency silver bullet to fix economies. Even if central banks do turn to helicopter money in any significant way — something which HSBC notes is a very real possibility in Japan going forward — it’s not going to be able to stop the rot.