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Helicopter Money – Myth and Reality

October 12, 2020 By Mircea Vasiu

Inflation refers to the price changes over a period of time. Two types of inflation exist – expected and unexpected. Out of the two, the unexpected inflation has higher costs as it is usually the result of an exogenous shock (e.g., oil crisis in the 70s).

For central banks and monetary policy, expected inflation is the element that can be predicted. Businesses better manage their budgets and make better decisions if they can incorporate expected inflation beforehand. For example, when taking a mortgage, it is normal for the contract to consider the level of future inflation. The more accurate the estimation, the better for all parties involved in the contract.

However, generating inflation is not easy. Traditionally, when too much money chasing fewer goods, the price will rise, and inflation appears. But how to deploy money to an economy so fast so that to turn inflationary trends?

One way is by using “helicopter money”.

Money for Nothing

Helicopter money is a concept economist flirted with for some time. Yet to be applied at a big scale, helicopter money literally means money for nothing. In other words, the state gives everyone money with the sole purpose of spending it. In return, it expects nothing – just, maybe, a restriction in terms of how long to keep the money before spending it.

The idea was first introduced in the aftermath of the Great Financial Crisis in 2008-2009. Then Fed’s Chair, Ben Bernanke’s experiment with quantitative easing, brought for the first time the discussion about helicopter money. More precisely, if QE does not work, how about helicopter money?

While it was not applied in the years following the 2008-2009 recession, it is a tool already used in the 2020 recession. The United States and other countries literally sent people checks or credited their bank accounts with money to spend. The difference is that with unemployment extremely high, people need money to survive. Helicopter money is an economic solution to a consumption problem – not a humanitarian concept.

Therefore, what we see in 2020 is an incipient phase of helicopter money. What happens in the months ahead is crucial for understanding the effects of such concepts. So far there is only an economic theory without being backed by practice.

If central banks can create expected inflation using helicopter money, a new tool suddenly becomes available to use. The big question is – after the inflation beast awakes, can central banks control it?