- Divergence Theme Questioned
- What to Expect from the Central Banks in 2017
- The ECB is Clearly NOT Hawkish
- Bank of England On Hold Until November
- Trump’s Proposal “Print the Money” Echoes Franklin and Lincoln
- Japan's Helicopter Money Play
- Brexit and the Derivatives Meltdown
- Central Banks Gaming
- Is that Buzzing Sound Helicopter Money?
- Is the Influence of the Central Banks Fading?
- Reinventing Banking
- Negative Interest, the War on Cash, and the $10 Trillion Bail-in
- The Future of Central Bank Monetary Policy
- Jeremy Corbyn’s Controversial Quantitative Easing Proposal
- Central Bank Season Heats Up
- Reserve Bank of New Zealand Rate Decision
- What has the ECB been Buying
- Four Central Banks Meet but FOMC is the Key
- Federal Overnight Reserve Repurchase Repo and Fed Funds Implications for 2015
- BoJ and ECB expected QE policies
- Unfitting Policies Will Not Save the Euro-area or Japan in 2015
- Can the $40 Drop In the Price of Oil Bankrupt the Biggest Banks?
- New G20 Banking Rules
- Central Banks Are Playing the Stock Markets
- A Public Bank Option for Scotland
- Preparing To Asset-strip Local Government The Fed’s Bizarre New Rules
- The Fed could Keep Rates at Zero through 2015
- Are Public Banks Unconstitutional? No. Are Private Banks? Maybe.
- New Challenges for an Old FED
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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.