Is that Buzzing Sound Helicopter Money?


Helicopter money is the rage. Central banks are talking about it. Economists are debating it. The media is rife with coverage. While it sounds important, it is not precisely clear what helicopter money means. 

It appears to have originated with Milton Friedman.  In 1969, he wrote: “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. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

Friedman offered a thought experiment of how policymakers could create inflation.  With many observers thinking that officials have exhausted monetary policy, it is little surprise that the helicopter money has returned to the lexicon.

In 2002, Bernanke said that “A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.”  This helps to demystify the concept a little.  Two characteristics are brought out in relief by Bernanke. 

First is the interrelationship between fiscal and monetary policies.  This is one of the criticisms some like the Bundesbank’s Weidmann has with some ECB policies.  It blurs the distinction between monetary policy (ECB’s mandate) and fiscal policy (for elected governments to decide).  Consider that US monetary policy (QE) led to the Fed being the largest holder of US Treasuries. 

The government pays interest to the Federal Reserve.  Last year, the Federal Reserve gave back to the federal government a little more than $100 bln and in so doing, offset about 40% of the government’s debt servicing costs.

The second notable characteristic of helicopter money is that it bypasses the banks.  The idea is to provide funds directly to economic agents who would spend, like households and businesses and cut short the circuit of capital by removing the financial intermediaries.  The financial intermediaries are banks.   For various reasons, including regulatory requirements, existing non-performing loan problems, weak economies and soft demand, many banks are either unable or unwilling to lend.

US banks spent a good part of the Great Depression sidelined.  The Federal Reserve lent directly to small businesses.  Now in the US, there are two channels of capital distribution, the banks and the markets.  Continental Europe and Japan still rely heavily on bank loans.  In Europe, the bank channel remains in disrepair, and many fear problems are still festering below the surface of at least one systemically important institution.