Helicopter money is a term used to describe a situation where a central bank prints a large sum of new money and gives it directly to the public. The name comes from the idea that the money is “dropped” into the economy like a helicopter.
Helicopter money is sometimes proposed as a way to fight deflation, or when interest rates are already at zero and can’t be lowered any further. Helicopter money could also be used to stimulate an economy that is in a recession. It boosts spending and economic growth more effectively in comparison to quantitative easing, as it increases aggregate demand which is the demand for goods and services. Hence, helicopter money and QE are not essentially equivalent.
What is Helicopter Money?
Definition: Helicopter money is a type of economic stimulus tool in which the government prints a large amount (increasing the money supply) and distributes it to the public to stimulate economic growth. Helicopter money is a way of increasing a nation’s money supply through additional spending, tax cuts, or increased money creation. The Covid-19 crisis prompted several stimulus measures that resemble helicopter drop money.
Milton Friedman, an American economist, and statistician coined the term Helicopter Money in his seminal paper “The Optimum Quantity of Money” (1969). He advocated a helicopter drop in which cash is dropped from a helicopter into an economy as if it were rubbish. However, some of its opponents say that helicopter drops might cause a hole in the central bank’s balance sheet. Let us understand how this type of government spending may increase the money supply and spur economic growth or can enhance government debt-
Understanding Helicopter Money
At its core, helicopter money is a form of monetary policy that involves the direct printing and distribution of money to help stimulate the economy. While there are different variations of this strategy, it is typically seen as a way for central banks to jumpstart economic growth in times of recession or deflation by injecting cash directly into the hands of consumers.
A helicopter drop of money is used to let consumers have more money to increase consumer spending. Critics say that helicopter money would lead to inflation because too much money would be chasing too few goods. They also worry that helicopter money would erode people’s faith in the currency, and could lead to hyperinflation and a loss of confidence in the economy.
Despite these concerns, there is growing support for the idea of helicopter money as a way to boost economic growth and combat low inflation rates. Some central banks, like the Bank of Japan and the European Central Bank, have explored this idea in recent years, although no concrete action has been taken as of yet. Still, the concept of helicopter money is one that deserves careful consideration and further study in the years ahead.
History of Helicopter Money Supply
The idea of helicopter money first emerged in the 1960s, when American economist Milton Friedman proposed that central banks print large sums of money and distribute it directly to citizens using helicopters.
While his proposal was initially dismissed as impractical or even absurd by many economists, there is growing interest in the strategy today as a way to jumpstart economic growth and combat low inflation. Some central banks, such as the Bank of Japan and the European Central Bank, have explored this idea in recent years, although no concrete action has been taken as of yet.
1. Revival in the 2000s
Helicopter money experienced a revival in the 2000s as a way to combat deflation, or when interest rates are already at zero and can’t be lowered any further. Helicopter money could also be used to stimulate an economy that is in a recession. In recent years, some central banks have explored the idea of helicopter money as a possible tool to stimulate the economy. However, no concrete action has been taken as of yet.
2. After the global financial crisis of 2008
The global economy is still struggling to recover from the 2008 financial crisis, and many economists are increasingly looking to helicopter money as a possible solution. While there are concerns about its potential impact on inflation and trust in the currency, there is growing support for this idea as a way to boost economic growth and combat low inflation rates.
3. The Covid-19 Crisis
The Covid-19 crisis has prompted several stimulus measures that resemble helicopter drop money. In March 2020, the United States government approved a $2 trillion stimulus package that includes direct payments to citizens, expanded unemployment benefits, and loans to businesses.
Examples of a Helicopter Drop
- The United States government approved a $2 trillion stimulus package in March 2020 that includes direct payments to citizens, expanded unemployment benefits, and loans to businesses.
- The European Central Bank is considering a proposal to distribute 500 euros ($546) to every citizen in the Eurozone as a way to boost the economy.
- The Bank of Japan has explored the idea of implementing a helicopter money program, in which it would directly distribute cash to consumers as a way to jumpstart economic growth.
Some economists are calling for central banks around the world to embrace helicopter money as a possible solution to low inflation and stagnant economic growth. They consider it an effective way to spark economic growth through a newly printed money supply.
Difference Between Helicopter Money and Quantitative Easing QE
Helicopter money is different from quantitative easing, which is another tool that central banks use to stimulate the economy. Helicopter money involves printing new money and giving it directly to citizens, while quantitative easing involves creating new money and using it to purchase financial assets such as bonds from commercial banks.
Helicopter Money – Pros and Cons
Helicopter money is a controversial idea, and there are pros and cons to this policy.
- Helicopter money could be an effective way to stimulate the economy and combat low inflation.
- Helicopter money is simple and easy to understand, unlike other economic policies.
- Helicopter money could be used to directly help people who are struggling financially.
- Helicopter money could lead to high inflation if it is not done correctly.
- Helicopter money could erode trust in the currency and the central bank.
- Helicopter money could have negative consequences for the economy in the long run.
Quantitative Easing – Pros and Cons
Quantitative easing is another policy tool that central banks use to stimulate the economy, and it also has both advantages and disadvantages.
- Quantitative easing can help lower interest rates in the economy, allowing businesses to borrow money at a more affordable rate.
- Quantitative easing can be used to buy assets like corporate bonds, which can help stabilize the financial markets in difficult times.
- Quantitative easing is a flexible tool that can be adjusted to suit changing economic conditions.
- Quantitative easing can have unintended negative consequences for the economy, such as creating asset bubbles or leading to higher levels of debt.
- Quantitative easing can be difficult to understand, which can lead to public confusion or mistrust.
- There is no guarantee that quantitative easing will be effective in stimulating the economy.
Helicopter money and quantitative easing are both controversial policy tools that have their pros and cons. Ultimately, it is up to central banks to decide whether or not to implement these policies, and how to do so in a way that is most effective for the economy.
Supporters of a Helicopter Money
Many economists and policymakers believe that helicopter money could be an effective tool to help boost economic growth and combat low inflation. The simple and direct nature of this policy is a major advantage, as it can quickly put money in the hands of consumers and help support businesses during difficult times.
- Former chairman of the Federal Reserve Ben Bernanke has spoken positively about helicopter money, saying that it is a “worthwhile idea” that should be considered in times of economic distress.
- ECB President Mario Draghi has also said that the ECB is open to exploring helicopter money as a possible policy option.
- Citigroup Chief Economist Willem Buiter is a well-known supporter of helicopter money and has even suggested that the U.S. government should distribute $1,000 to every American citizen as a way to stimulate the economy.
Criticism of Helicopter Money
Helicopter money is a highly controversial idea, and it has faced criticism from many economists and policymakers
- One of the main concerns is that it could lead to high inflation if not done correctly, as printing large amounts of money can have unpredictable effects on the economy.
- Once it has been implemented, there is no way to make money out of circulation or undo the effects of this policy. For these reasons, central banks must carefully consider whether this strategy is the right one for their economy.
- Additionally, helicopter money may erode public trust in the currency and central bank, as people may become concerned that they are simply being given free money with no strings attached. A money-financed tax cut may damage the independence of the central bank.
- There are also concerns that helicopter money could have negative consequences for the economy in the long run, as it could create inflationary pressure or lead to higher levels of debt.
While there is support for helicopter money among some economists and policymakers, many others are skeptical of this policy. Critics worry that helicopter money could lead to high inflation or other negative consequences for the economy, such as eroding trust in the central bank or creating asset bubbles. Some also argue that quantitative easing may be a more effective tool for boosting the economy, as it has a proven track record and can also be used to purchase assets.
Despite these criticisms, many economists and policymakers believe that helicopter money could be an effective tool to stimulate the economy in difficult times.
While there are certain risks associated with this policy, central banks must carefully consider whether it is the right strategy given their specific economic circumstances. Ultimately, it will be up to individual countries and their central banks to decide whether or not to adopt this strategy and how to do so in a way that is most effective for their economy.
Now, in the end, how effective do you consider a helicopter drop of money in safeguarding an economy which is in a liquidity trap? Which one in between helicopter money and quantitative easing do you find more effective? Share your thoughts with us in the comment section below.
Also, if you have any doubts about the concept of helicopter money, feel free to ask the M91 experts straight away!