Helicopter Money ! -- The Fed's Final Tool







Helicopter money is a radical form of monetary stimulus, first coined by Milton Friedman and made famous more recently by former Federal Reserve Chairman Ben Bernanke. In a hypothetical situation a helicopter could be loaded with money, fly over a city and drop the money, citizens would collect this money from the streets and spend in the local economy, in theory driving economic growth. With interest rates near zero ,and large amounts of Quantitative Easing already completed. Is helicopter money the central banks' final tool to preserve the economy and the fiat money system ? Welcome to The Atlantis Report. Helicopter money is a proposed unconventional monetary policy, sometimes suggested as an alternative to quantitative easing (QE) when the economy is in a liquidity trap (when interest rates near zero and the economy remains in a recession). The idea of ​​a monetary helicopter comes from Milton Friedman, and it's a metaphor, a pictorial view of ​​a helicopter, or an airplane who swings banknotes. This is not a concrete idea of ​​economic policy. So we understand that the goal behind, whatever its implementation, it's having a direct effect on household consumption. Imagine New York, in the near future. All of a sudden, banknotes fall from the sky, or more accurately from a helicopter. The pilot, would not be Santa, but a pilot of the Federal Reserve Bank. An imaginary scenario, worthy of a movie, and yet; This utopian idea of ​​ helicopter launching banknotes from the air unleashes the passions. It was even theorized as early as 1969 by one of the most influential economists in history: Milton Friedman. This theory is known as helicopter money. That is to say, a monetary helicopter. And the goal of this helicopter is to boost economic growth. Usually, two main tools are used to boost growth: #1. the budget by lowering taxes, and #2. the currency by lowering central bank interest rates to expand credit. Each time, in the hope that consumption and investment will return. The problem is that the fact of lowering taxes, the governments do not like much, because it means less money in the coffers of the state, at least in the immediate future. And as for interest rates, they are already at a historically low level in the United States. The margins of maneuver are therefore low. Hence this idea that resurfaces: that; of a helicopter dropping money from the sky. People are using and spending money to meet the ends of difficult months, do their shopping, or do some work at home. Two objectives can, therefore, be achieved: boost economic growth; or to raise inflation, that is, which is the general increase in consumer prices. The helicopter money is an image borrowed from Milton Friedman, the leader of the monetarists, these very liberal economists who had largely influenced policy in the United States and Great Britain since the 1970s. For him, if there was inflation, this was explained by a too abundant quantity of money in the economy. And if there was not enough inflation, it was because the quantity of money was insufficient. This led him to formulate this image of a monetary helicopter to say that in deflationary situations, where inflation is lacking, what is needed is to increase the amount of money in circulation. And thus dumping quantities of money into the economy by helicopter. This is the image he has developed. From Milton Friedman's theory to practice, the idea is gaining ground. As early as 2002, Ben Bernanke, at the time member of the board of governors of the US Federal Reserve, evoked the idea in a speech. Fourteen years later, and after being president, he talks about it again, calling it "Best possible alternative" "in certain extreme circumstances. " So much for the United States. And as far as Europe is concerned. Mario Draghi, President of the European Central Bank, did not completely rule out the idea of ​​the monetary helicopter. He expressed reluctance. And the reason there is the reluctance is that we do not know how, in practice, it would be done. The only thing ; the ECB is not allowed to do is to finance the deficit of the states directly. But everything else, including direct or indirect transfers to citizens on their bank accounts, potentially, remains legal. But then, why do not we still see these famous helicopters flying in the sky? In fact, it's not as simple as it sounds. If the money helicopter was put in place, what can be doubted because it seems to be for the moment a slightly original idea, and perhaps a bit too unique for the conservatism of the central bankers? But if the central banks came to experience it, this would make it possible to respond to a problem of transmission of monetary policy. However, it would probably not be a magic wand. Already, for sure, a helicopter can throw money from the sky, but that is just an image. A central bank could do the same thing with checks or transfers to citizens. More seriously, the first barrier is ideological. In theory, central banks run the billboard by lowering the key interest rates. This will directly impact commercial banks. And still, in theory, they should pass on this decline on credit rates. As a result, more individuals are subscribing to it, and there is more money in circulation. You understand : the banks are intermediaries. But with a helicopter, commercial banks are short-circuited, the money is distributed directly to individuals. And that, the banks do not like. And there are those who believe that it would weaken the banking system. It would not go through the banks anymore. If central banks were to distribute central money directly to households in the form of a voucher or notes, basically, no matter the style, it would be freed from the bank transmission channel monetary policy. This monetary helicopter, this instrument, is a little recognition, a malfunction in the transmission channel of monetary policy, the transmission channel is passing through the banks. The second obstacle, the money is distributed by helicopter so that the first arriving are also the first served. It can go to people with low incomes, who will actually spend the money because they need it, which will benefit them as well as the economy. But it can just as well go to people who can save, that is to say, who will let the money sleep in a bank account. Also, if consumers buy imported products manufactured elsewhere, this will not benefit the American companies. But above all, the opponents of this theory fear that if the helicopter money is used to raise inflation, the risk is that it works too well, to the point of leading to hyperinflation. In short: an uncontrolled rise in prices, and its pest effects. Their other criticism is that if a central bank directly finances households, the risk is that it will act under the pressure of governments, and thus lose its independence vis-à-vis the political power. Independence on which it based its credibility with the markets, and that allows it to be listened to in case of the financial crisis, as in 2008. And yet, despite all these obstacles, the latest Fed policies are questioning economists. In particular, the Central Bank has put in place a number of which are in a way similar to the monetary helicopter, or in any case that could be the monetary policy of the future and go further in that direction. I am thinking in particular of debt buybacks, and public debts in particular, in the markets, which gives the conditions to a, perhaps, coordination of monetary and fiscal policies. And I am thinking especially of the refinancing operations of the Fed to banks who return some of this money to the banks, provided that the banks lend to consumers, households, and businesses. We are not yet in a monetary helicopter situation, and it must be said very clearly. But we can go further in this direction with the tools that the Fed has already been put in place. It should also be noted that the Monetary Helicopter is a catch-all concept wherein the somewhat sensitive debate that we currently have we put a lot of very different ideas. If it's swinging banknotes by a plane on the population, it is the most basic version that, in my opinion, will never happen. If we talk about coordination between fiscal and monetary policies, so yes, I think that in some cases, we are going in that direction. In short, the helicopters have yet to convince before taking off. Now let's examine What Is the Difference Between Helicopter Money and QE? Helicopter money is a theoretical and unorthodox monetary policy tool that central banks use to stimulate economies. Economist Milton Friedman introduced the framework for helicopter money in 1969, but former Federal Reserve Chairman Ben Bernanke popularized it in 2002. This policy should theoretically be used in a low-interest-rate environment when an economy's growth remains weak. Helicopter money involves the central bank or central government supplying large amounts of money to the public as if the money was being distributed or scattered from a helicopter. Contrary to the concept of using helicopter money, central banks use quantitative easing to increase the money supply and lower interest rates by purchasing government or other financial securities from the market to spark economic growth. Unlike with helicopter money, which involves the distribution of printed money to the public, central banks use quantitative easing to create money and then purchase assets using the printed money. QE does not have a direct impact on the public, while helicopter money is made directly available to consumers to increase consumer spending. Differences in Economic Consequences. One of the main benefits of helicopter money is that the policy theoretically generates demand, which comes from the ability to increase spending without the worry of how the money would be funded or used. Although households would be able to place the money into their savings accounts rather than spend the money if the policy were only implemented for a short period, consumer consumption theoretically increases as the policy remains in place over a long period of time. The effect of helicopter money is theoretically permanent and irreversible because money is given out to consumers, and central banks cannot retract the money if consumers decide to place the money into a savings account. One of the primary risks associated with helicopter money is that the policy may lead to a significant currency devaluation in the international foreign exchange markets. The currency devaluation would be primarily attributed to the creation of more money. Conversely, QE provides capital to financial institutions, which theoretically promotes increased liquidity and lending to the public, since the cost of borrowing is reduced because there is more money available. The use of the newly printed money to purchase securities theoretically increases the size of the bank reserves by the number of assets that were purchased. QE aims to encourage banks to give out more loans to consumers at a lower rate, which is supposed to stimulate the economy and increase consumer spending. Unlike helicopter money, the effects of QE could be reversed by the sale of securities. Helicopter Money in Practice. Although helicopter money is an unorthodox tool to spur economic growth, there are less extreme forms of the policy if other economic tools have not worked. The government or central bank could implement a version of helicopter money by spending money on tax cuts, and thereafter, the central bank would deposit money in a Treasury account. Additionally, the government could issue new bonds that the central bank would purchase and hold, but the central bank would return the interest back to the government to distribute to the public. Therefore, these forms of helicopter money would provide consumers with money and theoretically spark consumer spending.










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