Helicopter Money: Bigger Threat to Currencies Than QE?
Quantitative Easing (QE) has so far not produced the runaway inflation some predicted. But before you start feeling comfortable about fiat currency again, central planners have another trick in store, i.e. “helicopter money,” a term that’s back in vogue thanks to a country that has tried almost everything to stimulate its economy: Japan.
Also read: Foreign Investors Dump Japan Stocks as Economic Planning Fails
A more extreme policy than QE, helicopter money (for reasons given below) could eventually lead to hyperinflation or a complete loss of confidence in the existing fiat monetary system. Terrible news for the legacy system and economic status quo, but it could also spark new interest in monetary alternatives, like you-know-what.
What is Helicopter Money?
The term “helicopter money” comes originally from a thought experiment by famed economist Milton Friedman in his 1969 paper “The Optimum Quantity of Money.” The metaphor is easy to understand – imagine someone dropping bundles of cash from a helicopter to the people below in a one-off occurrence. Once in possession of all that extra money, the people spend it, thus stimulating the economy and raising prices.
In reality, distributing the money would be more subtle. The central bank would supply the government with new money, which the government could give directly to the people or private businesses in the form of tax cuts or even direct deposits (there are several other ways, but those are the basic ones).
It’s different to that other central bank money-creation scheme, QE. Under QE, central banks keep the money they create by buying government bonds or other assets whereas helicopter money just sends it out, for no value in return.
Friedman was never suggesting a “helicopter drop” should happen, only putting it forward as a hypothetical to examine its effects on inflation and the costs of holding money.
As with most “what ifs” though, many will think it’s actually a good idea, and since the beginning of the century the topic has popped up repeatedly. Federal Reserve chairman Ben Bernanke famously revived it in 2002 (supposedly ignoring advice not to use the exact word “helicopter”).
Japan is Trying Again
The Japanese central bank concludes a two-day meeting today to decide its next moves to stimulate the Japanese economy, and reportedly it will consider whether to become the first country to essentially print money for direct distribution.
Japan was rumored to be considering a minimal helicopter approach, including sub-$100 payouts to low-income individuals. Just to test the waters.
This New York Times article calls it “monetary policy desperation,” after Japan has tried pretty much everything else to break out of its deflationary cycle and set inflation at a (supposedly) more healthy 2% per annum.
Creating inflation on purpose (inflation helps both government and private debtors by reducing the real value of the debts they have to pay off in future) is risky – what if it tips the balance, and that comfortable 2% inflation turns into something more Zimbabwean by mistake?
Breaking the Taboo
Policy-wise, it represents a “crossing of the Rubicon” – a taboo-breaking that, if not effective enough the first time, could be tried again and again and by more governments around the world. Try it once, need it again and again, spend the rest of your addicted life looking for the next fix as conditions get worse.
According to this Reuters article, global bond investor PIMCO referred to 56 examples of direct monetary financing since the 18th century (from France in 1795 to Zimbabwe in 2007), and said “all had dire economic consequences.”
In the most extreme case it could lead to hyperinflation, but this isn’t the only possible eventuality. Helicopter money is known as a last-resort effort, the policy so reckless it shouldn’t be tried. If it is tried, and it fails to stimulate either inflation or economic activity, there’s nothing else left.
How Do You Want your Bitcoin Revolution?
Many in Bitcoin would cheer such an outcome, and herald a new age of blockchain-based sound money with no central planners, a more stable value and no-one to meddle with the total supply.
But how do they want the Bitcoin revolution to happen? Suddenly, in a desperate rush to cryptocurrency following a complete breakdown of the previous system? Or a more gentle takeover, with adoption of sound money gradually replacing declining fiats?
What if it all happens in the next year, before Bitcoin’s congestion problems have been addressed and tested properly?
Right now it’s all in the hands of central banks, governments, and fate.
Even if Japan doesn’t act today, is “helicopter money” inevitable by someone, somewhere, eventually? Would you welcome the news or not?
Images courtesy of Pixabay, ilsole24ore.com, zerohedge.com, pimco.com