Helicopter Money; The New Quantitative Easing? 

Hey, glad to see you’re finally awake. 

The coma you’ve been in for two months unfortunatley had you miss the brilliant start to 2020 — we’re gotten closer to world peace, we stopped a major pandemic from spreading, we addressed runaway fiscal policy head-on, and democracies around the world are only getting stronger as capitalism becomes more sophisticated and supportive of the working class. 

A dream come true, you say? Truly. 

To catch you up with reality, let’s address the past week first. 

The market scare, driven by the novel coronavirus (Covid-19), prompted the U.S. Federal Reserve to cut interest rates by 50 basis points to a target range of 1% to 1.25%. This comes after the Fed cut rates by a total of 75 basis points in 2019.

As we covered yesterday, this did not inspire confidence due to the reactionary nature it symbolized. 

After all, Rate cuts are not able to stop the virus or its effects on resulting supply and demand shortages. All they can do is make it slightly easier for companies to take out loans, so the main effect of this rate cut, especially in the short term, is to prop up investor sentiment and decrease panic-selling.

“The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one,” Fed Chairman Jerome Powell told reporters. “Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”

Ok, thanks, Jerome. 

But where does this actually leave us? Where will interest rates go if U.S. stocks see another coronavirus-related correction, or even a full-blown recession, in the future?

After all, Even if the Federal Reserve doesn’t employ a negative interest-rate policy, global demand for U.S. debt could pull short-term Treasury yields below zero in the coming years.

More than $13 trillion of global bonds have negative yields, according to ICE BofAML Indices. In other words, investors are agreeing to take small losses to stash their money.

We saw that on display in 2016 as Central banks across the globe were struggling to spur economic growth. They had used nearly all their tools to attempt to spark economic growth, including negative interest rates and stimulus programs that buy bonds every month. The Bank of Japan and the European Central Bank (ECB) cut their interest rates into negative territory, attempting to stop banks from hoarding money and encouraging lending to consumers to support growth.

Another method of economic motivation that Central banks have used following 2008 is quantitative easing (QE). QE is used increase the money supply and lower interest rates by purchasing government or other financial securities from the market to spark economic growth.

Essentially, QE provides capital to financial institutions, which theoretically promotes increased liquidity and lending to the public — the cost of borrowing is reduced because there is more money available. More cheap capital means more economic activity because people believe the market is doing well. Repeat this for a decade and you get to where we are today — a fragile economy that needs interest rate cuts like a patient with an IV.  

QE really aims to encourage banks to give out more loans (also using fractionalized reserve) to consumers at a lower rate, which is supposed to stimulate the economy and increase consumer spending.

But of course, what happens when consumers stop spending for fear of going outside? Or they have little to spend due to plateaued wage growth? What happens when automation outpaces the job market? 

Here we find a novel idea increasingly floated by central banks: Helicopter money.

To understand helicopter money, imagine the Fed printed millions of dollars, loaded them into a fleet of helicopters, and flew them across the country while shoveling it out the door. 

As the theory goes, people pick up that money and decide to spend it. 

Yes. Really. 

Helicopter money is floated as an alternative to quantitative easing: where QE is meant to encourage banks, helicopter money is meant to encourage consumers. One of the main benefits of helicopter money is that the policy theoretically generates demand, which comes from the ability to increase spending without the worry of how the money would be funded or used.

However, the primary risk of helicopter money is that, as you might have guessed, it will lead to currency devaluation in the forex markets. 

Now, this is somewhat different from the concepts inherent in “Universal Basic Income”, which is meant more as a long term “steady” form of capital distribution, whereas helicopter money has a more short-term and temporary purpose. 

So is helicopter money as crazy or radical as it sounds?

Yes, in part, but we can see its ancestors throughout history. 

Many episodes of chronic hyperinflation led to the erection of sturdy firewalls between finance ministries and central banks to prevent the latter from being leaned on to print money for the former’s pet spending programs. In the case of Germany, which endured the harshest of hyperinflation in the 1920s, this led to a postwar constitutional provision that the Bundesbank should not be doing anything that constitutes “fiscal policy”.

These firewalls are therefore not to be taken down lightly.

The first line of defense will always be moderate interest rate cuts and further QE. 

Where politics permits, and since the cost of conventionally financed fiscal policy is so cheap (the positive consequence of ultra-low interest rates), old-fashioned tax and spending stimulus should take the strain and help the economy through the coronavirus crisis. 

But if the economic outlook becomes more desperate, we may need correspondingly more desperate measures.

It remains to be seen what that will entail. 

As this financial crisis has deepened, major central banks have agreed co-ordinated interest rate cuts and other collaborative action as a way to reassure markets that they were serious. 

A rather weak communique from G7 central banks and finance ministries on March 3rd promised to use “appropriate tools” but did not agree to any actual action.

Meanwhile, the helicopters are already lifting off in Hong Kong.

In February, the South China Morning Post reported: 

“Hong Kong permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion (US$15 billion) relief deal rolled out by the government to ease the burden on individuals and companies, while saving jobs.

Financial Secretary Paul Chan Mo-po confirmed an earlier Post report when he unveiled the payment during his budget speech on Wednesday morning, along with a full guarantee on loans taken out by companies to pay wages and taxes.”

So, will it work for Hong Kong? I really haven’t a clue based on few historical examples. 

Some say officials should just cut taxes instead. Maybe, but that is far less exciting.

It might all depend on how the policy is designed and if consumers expect more economic uncertainty — in which case they’ll take the helicopter money and stash it away. 

But, if Coivd-19 continues to haunt consumers and economies in the weeks and months ahead, expect more central banks to consider it.