As the developed economies of the world continue to struggle with bloated debt levels and subpar economic growth, some investors are beginning to wonder what more, if anything, central banks can do to stoke growth. After already embarking on either zero interest rate policy (ZIRP) and/or negative interest rate policy (NIRP) in most of the developed world, is the central bank toolbox empty? Not by a long shot.
Over the past few months, you may have seen reports about the possibility that central banks may resort to “helicopter money” if growth begins to falter. So what is “helicopter money”? Although Milton Friedman originally coined the phrase, the most often cited use of the term can be traced back to a speech given in 2002 by then Chairman of the Federal Reserve, Ben Bernanke, entitled “Deflation: Making Sure It Doesn’t Happen Here”. The following excerpts from this speech give insight into how central banks may choose to respond to an economic downturn if it were to occur at a time when interest rates are at or below the zero bound namely, the situation some economies are already facing, such as Japan.
“…some observers have concluded that when the central bank’s policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. …this conclusion is clearly mistaken. “
“…the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes as essentially no cost. … We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
But how would central banks do this, and why is it called helicopter money? They, of course, are not literally talking about dropping loads of money from a helicopter.
Rather, it is a fiscal stimulus program, such as a tax cut or large national infrastructure program, that isn’t paid for with more borrowing (i.e. auctioning off more treasury debt). Instead, the central bank will just electronically create the money (i.e. U.S. dollars) to “pay” for the tax cut or infrastructure spending. Thus, the economy receives a jolt of new spending and the U.S. doesn’t go deeper into debt. Sounds like a free lunch, no?
And if you think this is just some lunatic fringe idea being bantered about on internet blog sites with no chance of ever really happening, you would be wrong. Bill Gross, Janus Capital Portfolio Manager and author, in his latest Investment Outlook entitled “Culture Clash” discusses the idea in depth. In addition, a recent CNN Money article ran with the headline “Helicopter Money: central bank’ last resort”. In it Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, says “It’s a last resort of a desperate economy. I wouldn’t rule it out.” The article concludes by saying, “No matter whether it is ever considered, bottom line is that even talk of helicopter money is just a sign of the times that central banks may consider anything to reboot the global economy.”
We couldn’t agree more. Central banks will continue to do whatever it takes to promote economic growth, including helicopter money IF conditions warrant such a response. Given all this, we believe the likelihood of a sustained deflation (falling prices) in the U.S. is quite low. Why? Because all it takes to arrest such a decline is the WILL TO ACT on the part of the U.S. Federal Reserve. We believe they possess this will. Let’s just hope they never need to be put to the test.
If you’re interested in more information on helicopter money, check out these two articles.