The concept of “helicopter money” is increasingly presented as the next step in efforts to stimulate economic recovery in demand-deficient economies such as Japan or the Eurozone. But could it really work, and will it actually happen? Bill Papadakis of the Investment Strategy Team for Private Banking at Lombard Odier examines whether money could fly.
An ingenious way out
The idea is not as unreasonable as the name sounds. As a policy measure it has some important advantages. By combining monetary and fiscal aspects, it can have an impact on many fronts, boosting spending and income while also helping to raise growth and inflation expectations.
“Standard policy tools seem incapable of bringing about such results at the moment. Central bank actions are coming up against diminishing returns. Economies respond to interest rate cuts with ever less enthusiasm. Helicopter money could offer an ingenious way out of some of these problems. It could bring extra public spending without raising government debt. And it could be a much more direct form of stimulus than other measures tried so far.
Probability remains remote
Given the dynamics currently at play, and in particular the political opposition to more monetary easing, the probability of seeing helicopter money in action in the near future remains remote. It would require an unusual degree of cooperation between fiscal policy and monetary policymakers. It would also involve expanding central bank balance sheets further, which in some constituencies may reach their effective limit.
The world may have to live with only marginally more constructive fiscal policy in the future. While not a major driver of economic recovery, it is worth noting that fiscal policy in major economies is no longer a drag and is turning supportive in several cases. In China, the central government has decided to allow the budget deficit to widen in order to support its slowing economy. In the Eurozone the austerity era is mostly gone and with debt service costs falling as QE keeps pushing yields lower, governments have gained some fiscal leeway. State and federal budgets in the US have also turned a touch expansionary after acting as a contractionary economic force for several years.
The predominant expectation for Japan is now that the government will postpone the tax hike scheduled for next year, and will announce a fiscal stimulus plan. This might not be anywhere close to what is needed for the world economy to take off, but it might be just enough support to prevent hard landings.
But as we have learnt in recent years the policy landscape can evolve quickly, and if a new shock was to hit the world economy helicopter money may be the only bullet left.