Helicopter money could take flight

I have been thinking a lot about helicopters lately. Mostly this is down to the regular reminders to Santa not to forget to bring a helicopter, with doors that open and close and a rescue boat.

Partially it’s down to the increasing debate that is taking place on helicopter money, which is not something you give to Fisher Price.

Helicopter money is a concept originating with Friedman, but in fact going back to the Keynesian bottles in mines idea. Keynes noted the fiscal stimulus that would come from the state burying money in disused mines while Friedman mused on the effects if the central bank could simply drop money from helicopters. A good reasonably non-technical discussion on helicopter money is here. In both cases, output rises.

So what’s the problem? The usual case given is that massive increases in the money supply will, inevitably, cause inflation.

However, that is conceptually and empirically flawed. Empirically we have seen a huge expansion of the monetary base over the last decade. Since 2008 the Fed has increased by six times its balance sheet, from $800bn to $4.4tn. The Eurosystem increased its size threefold at max, although it is now shrinking. In both cases inflation has not been affected, in fact there has been a tendency for it to fall.

The same story can be told for the UK and Japan. Although there are complex reasons for the fall in inflation pressures, commodity price deflation, domestic demand collapses, deleveraging etc, the empirical evidence is strong that so far there has been no runaway inflation.

Central Bank money printing or easing has not fed hyperinflation. To the chagrin of the modern macrotheorists whose models are as mathematically elegant as they are profoundly divorced from reality, this stuff was discussed in some detail back in the 20s and 30s but was lost from memory.

Let’s look at the eurozone. Given that we have a transmission system that is spindled, folded, and mutilated, a private sector that either wishes not to borrow nor can borrow due to deleveraging requirements, a government sector that has bound itself to massive deleveraging, a money base that is shrinking, and deflation looming, what can we expect in the short to mid term but more of the same immiseration of nations and sectors.

We should consider helicopter money. It is, macro economically, essentially the same as a fiscal stimulus. The ECB cannot engage in direct monetary financing of governments. There is, I submit, nothing to stop them doing so for individuals. Let’s consider a situation where the ECB prints vouchers. Each is for a sum of say €100 and can only be spent in toto no change.We want to stimulate demand remember, so no taking the helicash to the pub.

In fact, the vouchers can be exchanged only for either a) debt repayment or b) large ticket consumer goods. Looking at retail sales as the heartbeat of the economy we see that compared to January 2006 they are 4% lower in deflated volume terms across the eurozone.

In some countries the fall from peak is 20% plus, (Portugal, Slovenia, Latvia, Spain a whopping 35% Cyprus and Greece down fully 53% from peak).

Even German trade is barely up from 2006 and down 3% from peak. So, let the helicash be utilisable for this. To make it work we need to make it fair and large. Final domestic demand is about €9tn in the eurozone. Let’s inject €3tn into the eurozone, over a year. That works out at about €8,000 per person. To make it fair we need to weight it towards the lower earners, so lets say this is in quartiles, with 10%/20%/30%/40% as a distribution. The helicash vouchers get sent to the bank, they give cash then swap them for cash at the eurosystem.

We see this week US President Barack Obama deciding that 53 years of action repeated time and again seeking but failing to get a different result suggesting that the action be discontinued. We have tried tight fiscal and monetary discipline in the eurozone to no avail. Its time for people who know that the policies are wrong to stop sitting in comfort atop the ECB tower, and to face down the hawks. But, they wont.