The actual meaning of the term Helicopter Money buzzing off recent is pretty different. While it may not sound as elegant as the plan of Sergio a.k.a. The Professor, it is quite simple yet a lot chaotic.
More often than not, due to natural disasters, floods/ famines, social instability or generally due to bad economic policies, countries find themselves in an economic mess, where people don’t have the money to buy goods/ services… resulting in falling revenues for businesses… resulting in businesses facing losses… resulting in them cutting jobs… resulting in people not having money to buy goods/ services… resulting in falling revenues for businesses… resulting in businesses facing losses… and the cycle continues.
Postulated by Friedman the term Helicopter Money is an unconventional tactic, wherein a large sum of new money, which is printed and distributed among the public to stimulate economic growth. It puts additional money in the hands of the people in the scenario illustrated above, enables people to buy goods, resulting in the business getting money and people finding jobs… breaking the vicious cycle of economic recession. Even economic superpower like Japan has considered Helicopter Money to boost its economic growth.
Helicopter Money doesn’t rely on increased borrowing to fuel the economy… which means that it doesn’t create more debt, and the interest rates can remain unchanged. Generally, Helicopter Money gives the instant kick start to the economy, which is not possible with any other forms of measures such as Quantitative Easing or Modern Monetary Theory, since in this form, the money given is not a loan, and the people are not obligated to repay the money to the government.
While it may not sound functional, it surely is. To explain it in a technical (and boring) way, the central bank prints money and gives it to the Centre for distribution to individuals or corporates, directly as cash or as tax cuts. Money can be transferred to the government as the central bank buys primary issuances of government bonds. But this method can work best in an extremely low-interest environment. Also, it will increase government debt. And since the central bank is but an arm of the government, when the balance sheets of the government and the central bank are consolidated, the bonds held by the central bank on the asset side will be cancelled by the same bonds held on the liability side of the government. Also, the future cash flows to the government through higher tax revenue, with demand getting stimulated, will enable it to repay the debt.
“Hey, this sounds wonderful… we should do it straight away…”
Nah, here is where the catch is. While it sounds like a fairy tale solution, just as every good thing there is… this comes with its own set of problems.
Firstly, this is like a bullet shot out of a Gun, and it is not reversible action, unlike quantitative easing, and many argue that it’s not a feasible solution to revive the economy since the regulators would have no proper control over this action.
Secondly, a country’s central bank sets its interest rates to reach economic growth targets. However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan). Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
Lastly and more significantly, it could lead to a huge devaluation of the currency on the foreign exchange market. As more money is printed and supply increases, the value of the domestic currency could significantly decrease. It could also discourage speculators from buying the currency as it is less likely to perform well.
While there is a lot of uncertainity in the ongoing economic disturbance due to the global pandemic, and governments coming out with multiple stimulus packages to revive the economy, we are yet to see how all the economies respond to these actions. While Helicopter Money may not be the single bullet to shackle the economic downturn, it can be used in congregance with other measures. Controlled shots of Helicopter Money may pass on to the needy helps to give a much-needed small initial boost to the economy.
While messy, the times are as interesting as it gets for a student of economics. Let us all hope the things will move for better. Let us wait and study how “Plan Delhi” of “Sergio Modi” pans out for the nation.
I request you all to Practice Social Distancing, sanitize consistently, and Stay Safe.