Britain’s vote to leave the European Union could lead to the introduction of the most unconventional of monetary policies — helicopter money — in the UK, according to economists at Morgan Stanley.
In a new note titled simply “Out into the unknown” economists Jacob Nell and Melanie Baker argue that the huge economic shock that Brexit has sparked could lead the Bank of England to look further than traditional monetary means to keep the British economy steady and ensure sustained growth.
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’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.”
There have been serious concerns about both the possible inflationary effects of helicopter money and its legality, and because of that — as Business Insider’s Ben Moshinsky pointed out in April — in recent years, helicopter money has “remained as more a thought experiment than a viable policy.”
But now the British economy has seen such a massive shock, helicopter money may be a necessary next step, the analysts argue. Asking the question “Helicopter money in the UK?” — Morgan Stanley’s economists respond (emphasis ours):
We see a possibility of a more radical fiscal and monetary policy option to help a UK economy suffering from a referendum recession. The objective would be to provide policy support through a targeted intervention with a high multiplier – use-it-or-lose-it consumption vouchers for the liquidity-constrained. We see this as a form of government money, which would ultimately be backed by long-term government debt held by the central bank.
It would be cheap, since the interest and principal would be paid by the central bank back to the government,and it could be effective, if it drove additional consumption rather than savings. However, such radical policy experiments would open up risks and could impact the credibility of UK institutions and the demand for UK assets. In this situation, the BoE’s scope for monetary policy action could become more constrained by the potential reaction of the FX and gilt markets.
While introducing helicopter money is a possibility according to MS, its introduction would be a huge volte-face for BoE governor Mark Carney, who told the House of Commons treasury select committee in April that it can lead to “a compounded ponzi scheme” and that he is “not a believer in the concept of helicopter money.”
Earlier on Friday, in response to the UK’s vote to leave, Carney suggested that he may be considering a cut to interest rates, saying: “In the coming weeks the bank will assess economic conditions and we will consider any additional policy responses. We’ve taken all the necessary steps to prepare for today’s events.”
Along with that hint, Carney said that the Bank is “ready to provide more £250 billion of additional capital” to prop up the British financial system.