What is Helicopter Money?

Published by Thomas Herold in Banking, Economics

'Helicopter Money' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Helicopter money is a phrase that economists and market followers employ to describe monetary stimulus on an aggressive level. It involves the ability of the government to print money and distribute it in an effort to create higher inflation.

This is a tactic that the U.S. Federal Reserve and Bank of Japan have both engaged in over the past since the Great Recession and financial crisis began in 2008. The Japanese central bank has been dabbling with the helicopter money idea again in 2016 as they are desperate to jump start their economy that has been in stagnant deflation for literally decades now.

The metaphor originally came into being around five decades ago thanks to the famed economist Milton Friedman. Former Federal Reserve Chairman Ben Bernanke revived the idea in the mid 2000s. The policy has been involved with economic catastrophes when it was misused. Despite this, the idea is being talked up again around the world as the world economy’s deflation continues apace. Some observers state that desperation in monetary policy leads to helicopter money when all other central bank endeavors fail.

In order for the European Central Bank or Federal Reserve to conjure money out of nothing, they must have a way to do this. Their preferred method is by purchasing assets such as bonds from banks. They affect this with money which is only an entry into an electronic accounting system. It is up to the banks to distribute the money around the national economy or economies at this stage. The problem arises when these traditional methods are not effective. If banks are not loaning out money in the form of mortgages or credit, the central banks are stymied in their efforts to move money aggressively around the economy.

Milton Friedman originated the thought experiment that defines the phrase helicopter money. In his paper “The Optimum Quantity of Money” from 1969, he came up with a whimsical idea. “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.” The immediate result would be a greater quantity of money flowing around and chasing the identical quantities of goods and services. This would lead to prices rising and thereby create greater inflation as a result.

The reason that central banks are desperate to get higher inflation is because of what Milton Friedman discovered about the Great Depression. His influential study on it showed that the economic collapse resulted from a failed monetary policy. Per Friedman, central banks did not provide a large enough supply of money, which permitted ruinous deflation to erupt and settle into the global economy.

Deflation means that prices are falling. This causes both businesses and consumers to hold off on spending money since they know that they can buy it for less money in the future. It raises the debt burdens of countries (as well as companies and individuals) since the money with which they must repay it will have a greater value in the future. Such scenarios lead to a vicious cycle. The weakness in the economy causes prices to fall, which in turn leads to additional economic weakness.

Many countries in the developed world are struggling with this in 2016. Japan and the euro zone are the biggest victims so far. This is why their banks have been pursuing a raft of measures that represent increasingly aggressive policies in their efforts to reverse the deflation. Helicopter money is one of the ideas they are talking about and experimenting with in their desperation.

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The term 'Helicopter Money' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.