Wednesday, September 7th, 2016
They will call it something else but “helicopter money” is coming.
In April the former head of the Federal Reserve, Ben Bernanke, published a blog post in which he advocated the use of ‘helicopter money’ as an alternative to quantitative easing (QE). Bernanke’s proposal was an idea originally made popular by American economist Milton Friedman in 1969 and amounts to a permanent increase in the money supply to be used to finance government spending. Friedman theorised that if one were to drop new money onto a city it was certain to accomplish two things: increase inflation and increase nominal GDP without creating a future tax liability.
History has many examples of central bank financed government spending which, if left unchecked, leads to hyperinflation as evidenced most recently by the horrific destruction of wealth inflicted by the Zimbabwean government upon its citizens. Naturally this means that any attempt to introduce such a policy is likely to be met with scepticism from all sides but we believe that not only is there a case for certain iterations of helicopter money but also that this is the most likely next port of call for policy makers should we enter a recession and so we should prepare for it whether we think it is a smart idea or not.
Let’s take the UK as an example. The economy has just received the self inflicted shock of the Brexit debacle and is going to enter a slow down in investment spending as a result. The Bank of England has dropped interest rates and restarted its QE program but if we look to Japan and the Eurozone to evaluate the effect these policies have had, the best one can argue is that it would have been worse without them and not use them as beacons of successful government policy. We would prefer to see the government initiate significant infrastructure projects that would improve the long term efficiency and size of the economy (infrastructure spending is one of the best value for money investments a country can make as the long term benefits are generally multiples of its original cost). If they financed this spend through debt it would burden future tax payers (who have to pay the debt back) but this is perfectly fair as these tax payers are typically the portion of the population that have benefitted from the project. Conversely, if one finances the project with freshly printed cash courtesy of the central bank then who is really paying? The value of the currency will devalue by the proportion of new money introduced (this will be seen through inflation) punishing those members of the population with savings (typically the older generation) and benefitting those with debt and obviously the party that receives the new money.
So it is clear that such a policy will have a few hurdles to clear before getting the green light but the current environment may be one of the few where it makes sense. Any market will attract its share of doomsayers and this one is no different. Right now these elements point to growing government and corporate debt as a certain trap that is about to obliterate the global economy. Our view is that while this is certainly a concern, it is nothing to worry about while interest rates stay so low. In fact, even though debt levels are higher than ever in many places, the actual cost of servicing this debt at such low rates has actually fallen to historically low levels as a percentage of GDP! The real worry will be if interest rates rise before inflation or growth has a chance to erode the real value of this debt and it has to be rolled and serviced at higher rates. If the global economy is hit by another recession then a short dose of helicopter money targeted at several well thought through projects could be the least bad solution to many of the issues that the world currently faces!