PressNewsCompanyPoint of view: Stormy weather for ‘money helicopters’

Stormy weather for ‘money helicopters’

Service & Contacts

Allianz Group Communications
Koeniginstr. 28
80802 Munich
Germany

Contact overview

Receive the latest Allianz news.

Newsletter

Follow Allianz in the social networks:

Facebook
Twitter
Google+
LinkedIn

  • Contact

  • Newsletter

  • Social Media

The European Central Bank on Thursday downplayed chances that it would suggest adding so-called helicopter money to its policy recommendations to revive the euro zone economy. ECB chief Mario Draghi said the unorthodox idea, which would in theory involve cash handouts to euro zone households, had not been discussed by the governing council at its regular policy setting meeting. Allianz chief economist Michael Heise explains the risks to such a radical measure.

 

Allianz SE
Munich, Apr 21, 2016

Allianz-Allianz chief economist Michael Heise.

Allianz chief economist Michael Heise.

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.

 
 

(Original source: https://www.project-syndicate.org/commentary/case-against-monetary-helicopter-drops-by-michael-heise-2016-04)

  Forward Looking Statement disclaimer

As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer:

 

  Press contact

Dr. Lorenz Weimann
​Allianz SE
Phone +49.069.24431-3737
Send email

  More at allianz.com

California Wildfires 2018: Reign of Fire

Allianz-California Wildfires 2018: Reign of Fire
Aug 14, 2018 | Allianz SE

Wildfires in California have burnt through 820,000 acres so far this year. As the U.S. state battles the blaze, is it time to accept that bigger and more frequent wildfires are the new normal?

More...

Allianz reports strong results for 2Q 2018 and confirms full-year outlook

Allianz-Allianz reports strong results for 2Q 2018 and confirms full-year outlook
Aug 03, 2018 | Allianz SE

After a successful start into 2018, Allianz Group continued to achieve good performance in the second quarter. Indicators remained close to or exceeded the second-quarter 2017 levels, despite burdens from geopolitical instabilities and currency fluctuations. 

More...

Allianz World Run 2018: Run Lola Run

Allianz-Allianz World Run 2018: Run Lola Run
Jul 31, 2018 | Allianz SE

Pull up your socks and dust off those shoes. The Allianz World Run 2018 has begun and you’re invited to be a part of the fun run to good health.Over the past two years of the Allianz World Run, more than 22,000 Allianz employees from 55 countries ran 2.75 million kilometers, each year smashing the record for the “longest cumulative distance run by one team in 90 days”. This time around, the event has been opened to everyone as Allianz aims to inspire more people to get moving. 

More...
More...