Helicopter Money: The Last Hope for Combatting Deflation?

A New Strategy to Tackle Deflation Gains Steam

Helicopter on scenic flight at sunrise, Alleghe, Dolomites, Italy
Oliver Furrer / Getty Images

The American economist Milton Friedman once mused that central banks could always defeat deflation by printing dollars and dropping them from helicopters. With negative interest rates across Europe and Japan in 2015 and 2016, many central banks and governments are starting to seriously contemplate the unthinkable – direct cash transfers to citizens. This may be a last resort for governments to overcome the growing risks of deflation.

The term helicopter money was termed to represent strategies where central banks and/or governments transfer cash directly to citizens rather than trying to indirectly influence lending and borrowing through conventional tools like interest rates. According to a growing number of economists, the idea isn’t as crazy as the term makes it sound. In fact, it may be the only sure-fire way to stimulate demand when conventional monetary policy has no effect.

Would Helicopter Money Work?

Few economists would argue that helicopter money wouldn’t be effective in stimulating demand and increasing inflation. While central banks have made it clear quantitative easing was a temporary program, helicopter money would permanently increase the monetary base since there’s no repurchasing of bonds. This difference could make helicopter money much more effective than quantitative easing at stimulating demand and inflation.

Suppose that a bank offers to lend anyone $10,000 interest free – or more accurately, charges them for not borrowing the money. Many people may decide to take the money, but they may be hesitant to spend it, knowing that they’ll eventually have to repay it. Now, suppose the bank gives them $10,000 free-and-clear.

Many people may assume prices will rise, since everyone will spend the money, and therefore decide to buy something now rather than waiting.

There are two potential risks to the strategy:

  • Rational consumers may simply choose to save the windfall rather than spend it, which would defeat the purpose of the strategy. In this case, it could be argued that consumers would feel wealthier and spend more over the long-term.
  • There’s a risk of a moral hazard whereby consumers would expect more money in the future. In the near-term, the risk is that they may hold off on spending for future allowances. In the long-term, it could devalue and shake trust in a currency.

A final problem is that helicopter money strategies would require a collaboration between central banks and governments, since it’s a combination of fiscal and monetary policy. Many central banks don’t have the authority to implement cash transfer programs on their own. Government lawmakers would have to acknowledge the strategy and come to an agreement with central banks, which might be politically difficult in many cases.

How Would It Work in Practice?

There are many different ways to implement helicopter money programs, but the most recent proposals involve both the government and central bank working together.

Former Federal Reserve Chairman Ben Bernanke once suggested a tax rebate financed through central bank purchases of government debt. By taking this approach, people would be refunded all of their income tax and the government would close the fiscal gap by selling debt to the Federal Reserve for newly minted cash. The central bank would then return the interest income to the government and hold the bonds in perpetuity.

There are many different versions of this strategy, but they all have the same end result with very little difference. For instance, a government may issue a special bond that is zero interest and non-redeemable to the central bank rather than having the bank return any profit. Or, a tax rebate may be replaced by some other type of cash transfer program that involves payments from the government to individuals and businesses.

Consequences of Helicopter Money

The fiscal consequences of helicopter money may be similar to those of quantitative easing. Under QE programs, central banks acquire assets and rebates the interest paid on government bonds back to the Treasury, so the budgets are the same as if no government bonds were actually required. The same would be true for helicopter money, since the government purchases would be the same and taxes would be raised to finance those purchases.

While the fiscal consequences may be benign, the social consequences could become quite severe in nature. There are dangers in breaking the barrier between independent central banks and governments, which could undermine future fiscal discipline on the part of governments. This may not be a major problem in developed countries that have an established track record, but those without such a track record may be at greater risk of lost confidence.

There’s also a long-term risk that central banks wouldn’t be able to control inflation when it begins to rise. With monetary policies able to better-handle inflation than deflation, this risk is seen as low by many economists, but it has happened in the past.

Key Takeaway Points

  • Helicopter money may be the last policy option for central banks and governments to combat the growing threat of deflation.
  • In simple terms, helicopter money involves a central bank creating permanent cash and distributing it directly to individuals and/or businesses.
  • There are many risks associated with this strategy, but most economists agree that it would be effective in stimulating inflation and growth.
  • The strategy would likely have the same fiscal consequences of quantitative easing, but the social consequences could prove to be much higher.