2016-03-23 Wed

The search for new solutions to the world’s low-growth, low inflation rut has made experts look at “helicopter money”. An essay by Milton Friedman in 1969 spoke about newly printed money dropped from helicopters which seems to be a logical option for any country struggling with deflation and slow growth. The concept debates that the government could always create inflation by printing enough money. When people spend the money, nominal gross domestic product would rise—either through the production of more goods and services, higher prices or both. Helicopter money is practically called monetary finance, or monetizing the debt, used to purchase goods and services.

Helicopter money is different from traditional fiscal stimulus where the government sells bonds to the public and uses the proceeds to directly stimulate demand. But more borrowing will push up interest rates, hurting private investment. Common people expecting their taxes to rise, may spend less.

Helicopter money merges QE and fiscal policy by eliminating limitations of both. The government issues bonds to the central bank, which pays for them with newly created money. The government uses that money to invest, hire, send people checks or cut taxes which could increase total spending. Private investment isn’t crowded out because the Fed, not the public, is buying the bonds.

Just because monetizing the debt can cause hyperinflation doesn’t mean it must. In ordinary times, the Fed is continuously monetizing debt to create enough currency and improve cash flow.

Richard Clarida, a Columbia University economist, predicts: “We will see a variant of helicopter money (perhaps thinly disguised) in the next 10 years if not the next five.”