Why Helicopter Money Can't Save Us: We've Already Been Doing It For 8 Years

There’s a lot of talk going around these days about “helicopter money.”

For those unfamiliar, it’s billed as a kind of last Keynesian resort when ZIRP, NIRP, and QE have all failed to boost aggregate demand and juice inflation.

For instance, HSBC said the following late last month: “If central banks do not achieve their medium-term inflation targets through NIRP, they may have to adopt other policy measures: looser fiscal policy and even helicopter money are possible in scenarios beyond QE and negative rates.”

And here’s Citi’s Willem Buiter from Septemeber: “Helicopter money drops would be the best instrument to tackle a downturn in all DMs.”

So what exactly is this “helicopter money” that is supposed to provide a lifeline when all of central banks’ other forays into unconventional policy have demonstrably failed? Well, here’s Buiter to explain how it works in theory (this is the China example, but it's the same concept everywhere else):

The first-best would be for the central government to issue bonds to fund this fiscal stimulus and for the PBOC to buy them and either hold them forever or cancel them, with the PBOC monetizing these Treasury bond purchases. Such a ‘helicopter money drop’ is fiscally, financially and macro-economically prudent in current circumstances, with inflation well below target and likely to fall further.

Now whether it’s “fiscally, financially and macro-economically prudent in current circumstances,” (or any circumstances for that matter) is certainly questionable, but what’s not questionable is that it is indeed feasible.

How do we know? Because we’ve been doing it for 8 long years.

If you think about what Buiter says above, it’s simply deficit financing. The government prints one paper liability and buys it from itself with another paper liability that the government also prints.

Sound familiar? It’s called QE.

The only difference is who the bonds are bought from. With QE, the central bank buys in the secondary market in an absurdly transparent attempt to pretend like there’s some degree of separation between the central bank and the government.

In so-called “helicopter money,” the central bank simply drops the bullshit facade (pardon the language) and buys directly from the government. But it’s all deficit financing. Need proof? Just compare changes in government deficits to the changes in bank reserves (i.e. where QE shows up) as shown in the table below.

Below, find a hilariously frank assessment from Deutsche Bank who basically asks, “why are we even talking about this as though we haven’t been financing deficits for years?”

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From Deutsche Bank

The argument that monetary easing has run its course and it is time to enact fiscal stimulus is starting to be heard around the world. The most eye-catching of such views is a call to deploy ‘helicopter money’, which we define as monetary financing of fiscal deficit. However, this argument is misleading. Surely this has already been implemented in many developed countries through QE. Why bring it up now despite it has been already deployed?

Figure 16 compares the cumulative central government fiscal surplus/deficit of developed countries over 2008- 15 (A) and the cumulative increase in the bank reserves portion of the monetary base (= almost the equivalent of the BoJ current account; (B)) over the same period. In Japan, for example, the cumulative increase in fiscal deficit for this period reached ¥225trn, while bank reserves increased by a cumulative ¥239trn. Thus, the increase in bank reserves exceeded the total fiscal deficit and the degree to which monetary policy financed the fiscal deficit (B/A)*(-1)) reached 106% (more than 100%). All the other countries, excluding Australia, Canada, and Norway, are already implementing on a set scale monetary financing of fiscal deficit, albeit not on the same scale as Japan. The degree of monetary financing is 82% in Sweden, 60% in the UK, 35% in the US, 26% in Denmark, and 16% in the Euro area. The most extreme case is Switzerland, where despite a fiscal surplus, the central bank has increased bank reserves 13.7 times greater than its fiscal surplus. Helicopter money has already been deployed in many countries. The reason that inflation is not rising in these countries despite helicopter money is that the currency (or monetary) regime has changed from a fiat money regime to a de-facto quasi-hard currency regime, the latter of which does not allow credit creation. Naturally, expanding the scale of helicopter money is possible in most of the countries.

A more extreme helicopter money argument is to request that the central bank altruistically not accept an equal value of financial assets (such as government debt) in exchange for central bank debt, which would in turn lower the net worth of the central bank, possibly into insolvency. However, this is mere academic theoretical brain-storming; in reality, we think a central bank that would seriously accept this does not exist.

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So the next step isn't "helicopter money", where that means monetary financing of the deficit. That's already happened.

The next step is pushing central banks into insolvency by making them fork over more cash to the government than the face value of the bonds they receive. While Deutsche doesn't think such a central bank exists, we think otherwise, especially considering the fact that if the interest rate the banks pay on reserves rises while the average coupon on the banks' bond holdings doesn't, negative equity is already in the cards.

And besides, the ECB is buying bonds that guarantee losses if held to maturity. So please, don't tell us about what central banks would "seriously consider."