Allianz Group Communications
Receive the latest Allianz news.
What is helicopter money?
The term „helicopter money“ was coined by Milton Friedman, a 20th century American economist. The basic principle is that if a central bank wants to increase inflation, one of the most effective tools would be to directly give money to every resident. As if a helicopter was flying over public space and dropping money bills from the sky.
Such presents from the helicopter might also take the form of tax credits or consumption vouchers for everybody, again funded exclusively by central banks. Governments or commercial banks distributing the money would be credited with a deposit or be given cash, but no claim would be created on the left-hand side of the central bank's balance sheet.
At first glance, getting a check from your government sounds great. But it’s actually not such a good idea. Why?
All of this would raise expectations among financial-market actors that central banks and governments would always step in to smooth out credit bubbles and mitigate their consequences, even if that meant accumulating more debt by the central bank. Their risk perception would be distorted, and the role of risk premiums would be diminished.
Helicopter money would have dangerous systemic consequences in the long run, because it would create perverse incentives for everyone involved. Policymakers would be tempted to resort to helicopter money whenever growth was not as strong as they would like, instead of implementing difficult structural reforms that address the underlying causes of weak economic performance.
Does today’s situation actually justify such an extreme step?
The answer is no. While helicopter drops are a viable policy option if deflation is spiraling downward, as it was in the late 1920s and early 1930s, that is not the case today – neither in the eurozone nor in the global economy.
Demand growth is subdued, reflecting the lingering fallout from the global financial crisis that erupted in 2008. Banks, firms, and households are still cleaning up their balance sheets and working off the heaps of debt they amassed during the credit boom that preceded the bust. But they have already made significant progress.
Consumers today are not holding back on spending because they expect goods and services to become cheaper, as one would expect during a period of deflation. Instead, they are gradually increasing their spending, taking advantage of restored income growth and large gains in purchasing power caused by collapsing oil and commodity prices. As a result, most advanced economies are once again producing at close to capacity.
Data on corporate profits also contradict the view that we are mired in deflation. Price stability has not put profit margins under pressure. On the contrary, in many advanced economies, profits are high – partly even at record levels – owing partly to lower input costs.
As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer:
Dr. Lorenz Weimann