Helicopter Money? You're not joking anymore, right?

Tuesday 19th July 2016

  

Helicopter Money? You're not joking anymore, right?

ref :- "Japan and Helicopter Money : Fan Blades Aren't Turning Just Yet" , Wall Street Journal Online 17/7/16

ref :- "Helicopter Money in Japan : A Guide" , ValueWalk online

Okay, so we were wrong not to take this one a bit more seriously. All this time, there we were thinking that the idea of  dropping cash from the sky, or rather it's central bank equivalent, was something so counter-intuitive that while it asked interesting intellectual questions of theoretical economists it was highly unlikely to come to pass in the real world. Turns out, it's being discussed as a distinct possibility and by some pretty heavy-hitters too. Former US Federal reserve Chairman Ben Bernanke is one of a number of high-profile figures either actively promoting the tactic or at least suggesting that it is due for some serious consideration.

It was the Tokyo visit of Mr Bernanke that has prompted analysts to upgrade the chances of this radical strategy actually being put into practice. "Helicopter Ben", as he is no doubt displeased to be known, met with many of the top officials inside and outside of the Bank of Japan and the timing of his trip also fuelled speculation that something out of the ordinary might in in the pipeline. It followed PM Shinzo Abe's convincing victory in Upper House elections which would seem to give the go-ahead for fresh fiscal stimulus, but perhaps the most compelling reason to consider Helicopter money seriously is that other measures that were also seen as radical in their time, negative interest rates and massive central bank bond purchases (QE), have been spectacularly unsuccessful thus far in stimulating either growth or any degree of inflation.  

It is highly likely that that BoJ's bond buying programme will start to taper off soon anyway ..... by the end of 2017, the central bank will own more than half of the total government bonds issued. Neither the corporate bond market nor exchange traded funds (ETFs) would be suitable substitutes for the BoJ. And as for negative rates, the jury is still assessing whether the intended benefits have actually materialised in any substance whilst the attendant problems are clearly identifiable, especially for banks. They certainly haven't had the effect of weakening the Yen  --  which would have been an undeclared but highly desirable side effect for the central bank. Up until last weak, the very opposite has been the case.

So, just suppose for one second Helicopter Money becomes a reality, what form would it take ?

Well, that's kind of the point with these things..... it's not been done before so nobody is quite sure of the best route to take (not least those of us who tend not to indulge in those intellectual exercises in theoretical economics that we talked about). Rather unromantically, cash will not be raining from the sky. Nor is it likely that people will wake up one morning with say $1000 (or JY100,000 ) in their bank accounts, although theoretically (forgive that word again) it could happen that way. Of all the many methods of "stimulus by helicopter" being put forward, and despite BoJ boss Kuroda being on record as ruling out direct monetization of debt, the suggestion gaining a good deal of traction of late is exactly that.

For example, the government could issue zero-coupon, perpetual bonds directly to the Bank of Japan . It would pay no interest on the debt , nor is it likely that it would ever redeem the bonds. The BoJ would hold the bonds on its balance sheet and guarantee not to sell them. Incidentally, you wouldn't have to be too cynical to suggest that's the way that the BoJ has been headed anyway, buying just about everything the Government issues anyway. Anyway, in principle and as a ONE-OFF (very important) blast of money creation  it might hold water. It's also important that the government uses the money for traditional fiscal stimulus alongside its "gift" to consumers, which would likely take the form of tax cuts.

Amongst other things, there are some very serious dangers regarding money supply and inflation attached to such a course of action. With QE and the increase in money supply needed to fund it, the easing programme is designed to take place over a period of time and will at some point be reversed. The fundamental difference with helicopter money is that the increase in money supply is IRREVERSIBLE.  Which is why any action should be a one-off ..... the effects to money supply of repeated trips to the well could be hyperinflationary.

It seems strange to talk of hyperinflation .... the purpose of any measure would be to prompt a bit of inflation after decades of zero, or even deflationary, numbers and suddenly we're talking hyperinflation ? But that's the trouble with such a radical and untried strategy .... one could very easily replace one problem with another even more dangerous one.