Helicopter money incoming?

Monday 07 March 2016

This blog isn’t ZeroHedge, but I’m unnerved about the recent willingness of mainstream news outlets to countenance the nuclear option.

I’m not one for the conspiracy theories. I can see the attraction of believing that the strings of the global economy are being pulled by shadowy cartels of supervillain uber-banksters who do deals in smoke-filled rooms, and that we ordinary people are just pawns in their game of squeezing value from hardworking but naive sheeple into their own pockets.

Unfortunately, I happen to believe that the truth is rather more mundane and arguably unwelcome. I’m with Hanlon on this one and will use his razor: Never attribute to malice that which can adequately be explained by incompetence. Yes, there was fraud and financial crime at the highest levels, yes there was collusion, yes, it was endemic, but no: there’s no SPECTRE-like organisation controlling it all - at least not with any degree of proficiency. Just common or garden short-termism, greed, opportunism, selfishness of the few at the expense of the many. One of the reasons is the old proverb that you can fleece a sheep many times, but only skin it once. Any criminal super-organisation worth its salt would have done a better job of creating a sustainable profit model, because if you go too far then the goose that lays the golden eggs ends up starving.

We’ve had low interest rates, we’ve had zero interest rates, and we’re now into negative interest rates. Inflation is stubbornly low and economies frustratingly sluggish in their growth, despite central banks’ massive exercise in money creation. We are well into unchartered economic territory. Nothing seems to be working.


Time to fire up the printing press and unleash a few of these bad boys

We’ve tried the unpalatable (austerity), played with the improbable (long-term low interest rates) and embraced the unprecedented (QE). So what’s left? To borrow a principle from Sherlock Holmes, ‘When you have eliminated the impossible, whatever remains, however improbable, must be the truth.’ With no firepower left in their conventional arsenals, central banks, if they are to do anything more, will have to leap right through the mirror into the world of fantasy economics.

Helicopter money

The idea of helicopter money was originally suggested by economist Milton Friedman in 1969. The thought experiment goes that if you want to boost economic activity and inflation, you might shower freshly-printed banknotes from the sky. Individuals would promptly grab these and go on a spending spree, thereby achieving what low interest rates and QE have not. There are nuances, of course. The ‘helicopter’ event could take a number of forms, from direct transfers to citizens’ bank accounts to spending on infrastructure projects or financing of government debt. A broad-based tax cut might have the same effect, and there have been widespread tax rebates (in the US) and windfalls from mis-selling scandals (in the UK) that have arguably done the same. Helicopter money is different from QE - which mainly involves buying government bonds - in that the effects of QE have not convincingly filtered through to the real economy, instead creating asset bubbles, inflating stock markets and housing prices.

There are problems, of course. Serious problems. The public has to be convinced that this is a one-off event, or they will anticipate the progressive devaluation of the currency and use their new-found cash accordingly (perhaps by paying down debt ahead of interest rate rises to combat runaway inflation). You also have to coordinate efforts across central banks and governments, which isn’t always as easy as you might think.

The biggest problem, though, is confidence. How could a central bank promise that it would not happen again - especially after so many failed rounds of QE and sub-zero rates? And would the public really buy the idea that printing and throwing around cash is a good idea, or would they realise that the so-called experts are treating the economy more and more like a game of Monopoly?

And this, of course, is where we come back to digital money. Bitcoin and every other cryptocurrency have fixed emission schedules. The immutability of the blockchain is a confidence tool. We all know what supply will be, and it cannot be tampered with for political ends - or any other ends. Whatever the strengths and weaknesses of that position, and of the global economy, you know where you stand in terms of money supply.

And that is a very attractive idea in a world where there appears to be a genuine conversation around the possibility of helicopter money. Just in case you haven’t grasped the significance of what’s being discussed here, I’ll end with a quote from Alan Mitchell, the Australian Financial Review’s Economics Editor. ‘The key feature of helicopter money is not how it's distributed, but simply that it is created by the central bank, saving the government the inconvenience of having to borrow it or tax it from the public. It is the modern version of the solution used by Germany to finance World War I reparations.’ I don't think things ended well for the Weimar Republic.


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