Richard Koo: If Helicopter Money Succeeds, It Will Lead To 1,500% Inflation

Tyler Durden's picture

After today's uneventful Fed announcement, all eyes turn to the BOJ where many anticipate some form of "helicopter money" is about to be unveiled in Japan by the world's most experimental central bank.

However, as Nomura's Richard Koo warns, central banks may get much more than they bargained for, because helicopter money "probably marks the end of the road for believers in the omnipotence of monetary policy who have continued to press for further accommodation in the midst of a balance sheet recession, when such policies simply cannot work."

As he continues, believers "have doggedly insisted that it is possible to control inflation because (1) inflation is everywhere and always a monetary phenomenon and (2) central banks control the supply of money. Based on this belief, they have implemented a variety of policies including quantitative easing, negative interest rates, forward guidance, and inflation targeting, each of which has failed to produce expected results. Now they have reached the end of the line, and the signpost reads “Last stop: helicopter money.

Koo continues to unload on central bankers, slamming their "faith that the economy will pick up if only money is dropped from the sky" that has provided a psychological foundation for economists and policymakers convinced of the efficacy of monetary policy. It also explains why nothing has worked yet. The Nomura strategist then mocks "their belief that dropping money from helicopters would revive the economy that has led them to assume that slightly less extreme policies such as quantitative easing and inflation targeting would also have a positive economic impact (albeit a more modest one)."

This is precisely what we said in March 2009 when the Fed first launched QE, and were mocked. It has now become mainstream.

* * *

We also predicted that the endgame will ultimately be hyperinflation, after an extended period of intermediary steps in which central bankers stumble from one interim, and flawed, "solution" to another, until they finally hit the monetary endgame...  which is where we are now.

Koo admits as much by highlighting the paradox of helicopter money   (assuming the form it is most likely to be implemented under, i.e., financing of deficits) namely that if and when it is ultimately successful, it will assure hyperinflation. This is how he puts it:

Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves.  


That implies that if businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the UK.


Once private-sector demand for loans recovers in these countries, confidence in the dollar, euro, and yen will plummet unless the Fed reduces excess reserves to one-fifteenth of their current level, the ECB to one-fifth, and the Bank of Japan to one-twenty-eighth.

So what's the problem: just soak up reserves, i.e., sell central bank assets?

However, as Koo puts it, "that sort of extreme reduction in reserves will require the central bank to sell the bonds it holds, which would be a nightmare for both the economy and the bond market."

In short, it would result in a bidless (already illiquid) bond market with yields exploding, and likewise trigger an explosion in inflation as suddenly interest rates go through the roof, countless companies default on their debt, and the value of both debt and credit implode.

* * *

Below we present selected excerpts from Koo's full "cost-benefit analysis" of helicopter money, and specifically the four forms it could take, and why each of them is ultimately doomed.

1. Dropping money from the sky

A look at the helicopter money debate in Japan and elsewhere shows that the actual policies being discussed can be classified into four main types. The first is helicopter money in the literal sense of dropping money from helicopters. Would this work? In Japan, at least, it would be another complete failure. This is because when the typical Japanese finds a 10,000-yen note lying on the ground, she will turn it in at the nearest police station rather than spend it. Put differently, a helicopter money policy can only work if the people in a country have little sense of right and wrong.

No seller would exchange products for money that fell from the sky

Another critical omission from the argument that helicopter money will resuscitate the economy is that it focuses exclusively on the logic of buyers while ignoring the logic of sellers.  Unethical buyers may try to go shopping with money that has fallen from the sky, but there is no reason for sellers to accept such money. Sellers are willing to take money in exchange for goods and services only because the supply of that money is strictly controlled by the central bank. If money starts falling from the sky, sellers will refuse to accept it as payment for their products. If the authorities actually began dropping money from helicopters, shops would either close their doors or demand payment in foreign currency or gold, and the economy would quickly collapse. There is no economy so wretched as one that no longer has a national currency the people trust.

Helicopter money not the ultimate form of monetary accommodation

In light of the above, the argument that monetary policy can be relied upon to boost the economy because helicopter money is the ultimate form of monetary accommodation and always works can be seen to be complete nonsense that ignores the standpoint of sellers. Taking monetary accommodation to those extremes would lead to the economy’s collapse, not its recovery. There is no case in recorded history of an economy without a credible national currency outperforming an economy that has one. 

2. Financing government deficits

In response to this criticism, some proponents of helicopter money would probably say that the helicopter money policies now being discussed do not involve actually dropping money from the sky but rather call for direct financing of government fiscal expenditures by the central bank. In this, the second version of helicopter money, the money is supplied in a way that is not immediately visible to ordinary citizens, so it may take time before sellers begin refusing to sell, but the problems that remain are no different from those of quantitative easing.

Financing of fiscal expenditures during balance sheet recession does not stimulate economy

Fiscal stimulus itself can provide a large boost to the economy. But while direct financing by the central bank may increase reserves in the banking system, those reserves will be trapped in the banking system because there are no private-sector borrowers during a balance sheet recession even at zero interest rates. Prime examples include post-1990 Japan and the leading Western economies since 2008. At such times, the “direct” part of the direct financing of fiscal stimulus cannot stimulate the economy or raise inflation any more than the “non-direct” QE. Both growth and inflation have remained at depressed levels in Japan (since 1990) and the West (since 2008) regardless of how accommodative monetary policy has become because the private sector stopped borrowing after the bubble collapse slashed the value of its assets but left its liabilities intact.

Question of how to mop up excess liquidity has not been answered

Eventually the private sector will complete its balance sheet repairs and resume borrowing. When that happens, inflation can quickly spiral out of control unless the central bank drains the liquidity it pumped into the market under quantitative easing or helicopter money. For example, excess reserves created by the Fed currently amount to some 15 times the level of statutory reserves. That implies that if businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%. The corresponding ratios are 28 times for Japan and Switzerland, five times for the eurozone, and 11 times for the UK. Once private-sector demand for loans recovers in these countries, confidence in the dollar, euro, and yen will plummet unless the Fed reduces excess reserves to one-fifteenth of their current level, the ECB to one-fifth, and the Bank of Japan to one-twenty-eighth.

But that sort of extreme reduction in reserves will require the central bank to sell the bonds it holds, which would be a nightmare for both the economy and the bond market. It would be a different matter if we were talking about future increases in reserves under a helicopter money policy, but the Fed has already created some $2.5trn in excess reserves under quantitative easing, and the BOJ has created ¥250trn, which means the monetary authorities cannot avoid the issue of draining those funds from the market.

3. Government scrip and perpetual zero-coupon bonds

A third version of helicopter money involves government money printing or the replacement of the JGBs held by the BOJ with perpetual zero-coupon bonds. The people proposing these policies hope that fiscal stimulus financed by government scrip or perpetual zero-coupon bonds, which are not viewed as government liabilities, will elicit spending from people who are currently saving because of concerns about the size of the fiscal deficit and the likelihood of future tax increases. Economists refer to this reluctance to spend because of worries about future tax hikes as the Ricardian equivalence. If true, it implies that consumption will increase each time the government raises taxes since higher taxes mean lower deficit in the future. The fact that this phenomenon has never once been observed in the real world suggests it is nothing more than an empty theory.

Moreover, there are serious issues that must be confronted once the economy picks up and the liquidity supplied by the monetary authorities via government scrip or zero-coupon perpetuals must be drained from the system. Perpetual zero-coupon bonds are essentially worthless, which means the BOJ cannot sell them—no one in the private sector would be stupid enough to buy them. That means the only way to mop up the excess reserves created via the issue of perpetual zero-coupon bonds is for the BOJ to ask the MOF to issue equivalent amounts of coupon-bearing bonds. The same would be true when trying to mop up reserves created by government scrip. Once this scrip starts circulating, it becomes part of the monetary base, and draining it from the system will require the government to absorb it by issuing bonds. And in the case of both perpetuals and government scrip, the government that issued the bonds cannot spend the proceeds. If the government spends them, the liquidity that had been mopped up will flow back into the economy again. Those recommending the issuance of government scrip or perpetual zero-coupon bonds say that one advantage of this approach is that it does not lead to an expansion of government liabilities (upon issuance). However, they will become massive government liabilities when the economy eventually recovers and they must be mopped up.

Helicopter money proponents silent on issue of mopping up reserves

In other words, the biggest issue with helicopter money—as with quantitative easing—is the question of how to drain these funds from the system. It becomes clear just how problematic both policies are when the difficulty of draining reserves is taken into account. Yet in all the discussion about helicopter money and quantitative easing in Japan and elsewhere, almost no one has touched on the massive costs involved in mopping up the excess reserves created under these policies. Everyone emphasizes the benefits of these policies when introduced while ignoring that those benefits are small indeed when we examine the costs and benefits over the policy’s lifetime. As one example of this bias, Waseda University professor Masazumi Wakatabe argued in a Nikkei column titled “Easy Economics” that helicopter money is preferable to quantitative easing inasmuch as it enables the government to undertake fiscal stimulus without increasing its liabilities.

I suspect that the helicopter money envisioned by Mr. Wakatabe involves the issuance of government scrip or direct central bank underwriting of perpetual zero-coupon bonds. However, he makes no mention whatsoever of how the liquidity created via these methods will be drained from the system once private-sector demand for loans recovers.

Helicopter money offers no benefits whatsoever over policy’s lifetime

As described above, the only way to mop up liquidity that has been created using these methods is for the government to issue bonds and not spend the proceeds. I think this would be more difficult from both a legal and practical perspective than winding down quantitative easing, which in itself is no easy task. Moreover, the amount of government debt that must ultimately be acquired by the private sector is no different from a case in which the government had issued bonds to fund fiscal stimulus from the outset.

In short, whether fiscal stimulus is funded with government scrip and zero-coupon bonds or with the ordinary issue of government debt, the size of the government’s liabilities will be the same in the end. Helicopter money offers no benefits whatsoever when viewed over the lifetime of the policy, including the eventual need to mop up liquidity.

4. Handing cash directly to consumers

A fourth version of helicopter money involves handing out money directly to consumers, without requiring it to pass through financial institutions. In this scenario, a consumer might open her mailbox one morning to find an envelope from the Bank of Japan containing ¥1mn. While that discovery may bring momentary happiness, I suspect she may feel a chill down her spine once she realizes everyone around her had received similar envelopes. And if such envelopes arrived day after day, the entire country would quickly fall into a panic as people lose all sense of what their currency is worth. Regardless of what buyers might wish to do, sellers would be forced to protect themselves, with stores putting up signs requesting payment in either foreign currency or gold. This is a nightmare scenario.

* * *

Why is helicopter money so popular?

What I find fascinating is why so many pundits in Japan and elsewhere continue to promote policies like quantitative easing and helicopter money while completely ignoring the need to eventually mop up all the liquidity created under these policies. One possibility is that this marks the last stand of the academic economists who have been insisting for the past three decades that monetary policy is the solution to all economic problems. Mr. Wakatabe, for example, declared without irony that “the problem of how to increase nominal GDP always has an answer: helicopter money.” This argument completely ignores sellers’ reactions and the ultimate cost of mopping up excess liquidity. Yet even Mr. Wakatabe acknowledged in the aforementioned Nikkei column that no matter how much money the central bank supplies under quantitative easing, “the money available for people to use will not increase unless financial institutions start lending more.” This statement suggests that the professor has finally realized the shortcomings of monetary policy during a balance sheet recession, something we have been talking about for the last 20 years. And that, in turn, may be why these economists are now leaning in the direction of helicopter money, which could go directly to the households and not depend on financial institutions.

Will private-sector loan demand ever recover?

Another possibility is that these economists are assuming private-sector loan demand will never recover. If that were in fact the case, there would be no need to mop up the liquidity, and consequently no need to worry about the attendant costs. The current economic slump could continue indefinitely if people who had terrible experiences digging themselves out of debt following the asset bubble’s collapse decided they would never again borrow money. In that case there would be no need for the central bank to move quickly to mop up the funds created under quantitative easing and helicopter money. It is extremely difficult to project when the private sector will overcome its debt trauma and resume borrowing, inasmuch as there are few historical instances in which an economy has emerged from a balance sheet recession. But I think it is dangerous to keep quantitative easing and helicopter money policies in place based on the assumption that the current situation will continue forever. After all, success for all policies including helicopter money is defined as a recovery in private-sector demand for loans.

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noless's picture

No it won't, it's not like they're going to give it out to everyone, just the right people.

I M DeMan's picture

Zactly. I personally have not seen a dime of the Bush-Obama-Paulson-Geitner Bankers Bailout  Just more hardship and longer hours of work.

cheka's picture

pump it into the chosen while extracting it out of the rest

keeps overall price rises under control

Boris Alatovkrap's picture

If helicopter is too inflationary expense, Boris is recommend Russian Mi-24 over Amerikansky model. Powerful rotar and nice side arm rocket launcher.

Aristotle of Greece's picture
Aristotle of Greece (not verified) Boris Alatovkrap Jul 27, 2016 9:53 PM

The problem with the Fed's helicopter money is that it doesn't trickle down, it floats at the top only.

erkme73's picture

Aristotle = SPAMMER

Gargoylian = SPAMMER

Hint: they're both the same account.

TwoCanPlay's picture

Completely transparent.  Gargoylian just registred a few weeks ago, and only comments to support the spammer.

The Saint's picture
The Saint (not verified) TwoCanPlay Jul 27, 2016 10:58 PM

"....with yields exploding, and likewise trigger an explosion in inflation as suddenly interest rates go through the roof...."

Ah, no.  Rising yields would not trigger an explosion in inflation.  Quite the opposite.

MalteseFalcon's picture

Give the helicopter money to the unemployed by extending unemployment benefits.

Let the "wealth" trickle up.

Jeffersonian Liberal's picture


Exactly. This money will never make it out of the ZIRP to Discount Window to Primary Bankers to Investment loop.

It'll drive the indices vertical and make a lot of money for the chosen.

A mild portion of that will trickle down to inflation that robs the rest of us of what little we're able to hold on to.

There has got to be another use for all those traffic signals in NYC.

SgtShaftoe's picture

Didn't you get your $500 bucks from G Dub after 9/11 in your tax return? 

Zero Point's picture

BTFD you stupid assholes and you'll see where the helicopter money goes.

Aubiekong's picture

Spend it while it buys something...

JohnG's picture


In Zimbabwe, 100 Trillion helicopter dollars bought you three eggs.

People were mining gold from the hillsides, if you could not get 1/3 gram a day, they died.

Buy gold, bwcause Zimbabwe here we come it's just a matter of time till these madmen fuck us all.

skinwalker's picture

It might be less painful to simply stop everything and start over.

El Hosel's picture

.... Yeah but who gets Boardwalk and Park Place?

ArkansasAngie's picture

"Once private-sector demand for loans recovers ..."

For there to be a demand for loans there has to be a demand for things that the money borrowed will "make".

We don't need any more plastic flowers 

We don't need any more high end rental condos in Miami ... or New York or San fancisco or ...

Inflation doesn't increase demand for loans ... unless you have a liquidity problem.

This isn't a liquidity problem.  We have an insolvency problem.

TalkToLind's picture

Forget the helicopters, have the sheep use a phone app to search around public areas for virtual dollars.  This game is healthy and shit.

pitz's picture

You might be onto something.  Isn't there a Middle East country that pays its citizens, in Gold, for maintaining a certain level of physical fitness.

VWAndy's picture

By the time hellicopter money hit the ground its actual value will be near to 0 or 0. At that point credit would be all that was effective as a MOE. Hang any hellicopter money BS spewing bandits. Hemp rope is best.

trollster's picture
trollster (not verified) Jul 27, 2016 8:38 PM

It won't work. Velocity is dead in the water, so this helicopter money stuff that should prop up inflation will be like pushing on a string.

They just don't have anything else left in their arsenal and just have to hold the appearance of "growth" until the elections. 

In the end, it will be a colossal blow-up - a supernova, if you will.

reader2010's picture

Gee. Why precisely at 1500%?  How did he come up with nice numbers like last that? Why can it be 35,000% inflation? Anyone has any insights?! "

I M DeMan's picture

My calculation is 1852% inflation...but I'm bad at maff.

El Hosel's picture

Open a wheel barrel factory and forget about it.

The Ram's picture

Well, it's metaphoric anyway.  Once an economy climbs over 100% inflation, it's days are numbered.  Look at America.  Most people live on the edge of starvation these days.  So, effectively doubling prices (by watering down the value of their money) would blow most working people out of the water.  When you stand at the precipice, it does not take a huge push to go into the abyss.  

fattail's picture

That is the level of excess reserves the Fed is holding on its BS compared to the level of statutory reserves.

ACES FULL's picture

Someone must think its coming. Almost all PM's are jumping.

media_man's picture

So the seniors trying to stay alive on $1800 SS checks will starve to death. How much food will the average $200 monthly EBT card buy? Blood in the streets.

Dark Daze's picture
Dark Daze (not verified) media_man Jul 27, 2016 9:09 PM

Exactly. Just to replace my current expenses, at that rate of inflation I would need a minimum of half a million dollars a year, and my annual expenses are not that large. Governments would be forced to pay out huge sums in inflation protection on their pension payments while the cost of money would skyrocket and stay high for who know how long. Helicopter money is a one way ticket to social collapse.

pitz's picture

Anyone "trying to stay alive" instead of 'thriving' on a $1800/month SS cheque needs help with their budgeting. 

DanDaley's picture

Staying alive right now on $1800/mo is entirely doable, but he's talking about when the inflation rate reflects the 15x + statutory limits (or, 1500% inflation) flood into the economy -that's when $1800 becomes miniscule.

Dazman's picture

Nope. Not until the VELOCITY OF MONEY increases. And velocity has been in sharp decline for some time now. Although I do think that helicopter drops will increase the velocity. BUT it could go the other way of people just safe it. That would cause the velocity to spike even lower.

konadog's picture

Higher prices and product shortages - yes.  Economic growth - no.  No business is going to ramp-up production and hire people because they know helicopter money isn't sustainable.  Central bankers are idiots. Complete f%@cking idiots. 

DaveA's picture

This article explains what happens when central banks try to fight deflation by printing money:

Deflation means that people would rather hold money than invest in productive enterprises. Hyperinflation means that they don't view government scrip as "money". Contrary to popular belief, both can happen at the same time.

jfb's picture

Helicopter money will never be used beause the banks cannot profit from it. The bail in of the failed banks however, is extremely deflationist but here most countries of the G20 thought it was a good idea to confiscate the money of the deposits and give it to the banksters if there is a liquidity crisis. Deflation is just bad when the profits of the banks are jeopardized. So expect more government spendings and "stimulus", higher taxes to py the interests of the new debt, but no helicopter money in the form of a check in the mail.

robnume's picture

1,500% inflation? Jeezus. I'm already having a hard time making ends meet and TPTB are gonna pull this shit? Will we get our revolution then?

quiet desperation's picture

Of all the people I want to see hanged, Bernanke leads the list. 


Bill of Rights's picture

I'm borrowing every dime they will give me, mortgage , credit cards stock leverage all of it and I'm spending all of it on real
Money. See I've been honest all my life and decided it's more profitable to become a shit bag debt slave, and like the rest over the past 40 years if I can't pay back what I borrowed oh FUCKEN well....

Ya I inow morally wrong right? Don't care, Just joining The club .

saulysw's picture

Australia tried this in 2009, most people got $1000 direct deposited in their account.

Did it work? It was small, one-off and most people just spent it without another thought. So, sort of. Smart people were somewhat alarmed and many simply paid off credit cards so the money went straight back to the banks.

Aussiekiwi's picture

Actually I believe this did work....for awhile, the problem is like QE, the US could never just do it once and that path leads to lots of uncontrollable inflation.

SgtShaftoe's picture

They could simply credit tax credit recipients from the last batch.  It would slam money velocity for a time.  We've had a similar situation in the 30s with the soldiers from WWI.  They wanted their bonus money early due to the depression and the government gave it to them thereby spiking velocity and inflation for a time, but it petered out.  They did another one to lesser but similar effect. 

We are so far down the low return on dollars borrowed that I don't think much in the way of stimulus will be felt, but they'll certainly try it.  If they know their history, they might try to duplicate that event from the 30s.   

Herdee's picture

It will go on forever.If you think about how long Japan has lasted,just wait for the U.S.,Europe and China to do the same scam.Ben Bernanke said interest rates will never normalise during his lifetime.The only thing that can change this are unknown black swan events which will force a new global monetary system based on gold.Unless of course they get rid of fiat paper money altogether along with banks and interest rates.

Son of Captain Nemo's picture


Where ya been brother... What does $20 Trillion mean to you "already" with interest rates non-existent going on 8 years.

Do you go by Richard or "Dick"?!!!

Eddielaidler's picture

Helicopter money already started . My daughters student loans were forgiven

MrButtoMcFarty's picture

Inquiring minds would love to know how you made that happen...


onmail1's picture

<-- And america deserves it

u cant fund wars forever on QE

THE DORK OF CORK's picture

Printing enough money and distributing it equally to match prices ( Gdp) is not inflationary


You will see a dramatic drop of prices.

The inflation of the past, seen especially in the  80s will be no more.

Back then economies of the first world totally collapsed. (as a result of usury controls lifted) 

Transport inputs especially will collapse,  returning inputs into real consumption rather then into the racetrack economy.

THE DORK OF CORK's picture

Again Ireland has seen a 25 %  ~increase in prices ( GDP) in 2015 with almost static increase of net national income and domestic money supply.

Huge  increases in jet kerosene and diesel inputs have been witnessed.

A complete dislocation of prices relative  to income

That's inflation baby.

something similar happened in the late 1980s with devastating consequences for society,  small business etc etc.

If or when prices match income again then on cue you will observe massive drops in transport inputs.

Oil deflates,  therefore prices deflate.

THE DORK OF CORK's picture

 "Put differently, a helicopter money policy can only work if the people in a country have little sense of right and wrong."

Puritanical nonsense. 

The function of production should be consumption,  not hoarding stuff.

Money is the enabler. 

Do you seriously think my publican will not collect company tokens from his customers if their spending power increases..... 

If income matches prices again then a very simple and wonderful thing will happen

The ghost of Christmas present will return.

JailBanksters's picture

That's just wishful thinking, and a hopeful number

I think somebody been peeking at my Christmas List.