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Helicopter Money: Let’s Keep It Grounded

By Richard Stavros on May 10, 2016

Some market experts are putting forth an off-the-wall policy known as “helicopter money” to generate economic growth. But it could compromise the integrity of the Federal Reserve and other central banks, and possibly spark runaway inflation. And with runaway inflation interest rates would go sky high and future growth would be severely hurt as the cost of borrowing would become 1970’s steep. 

Helicopter money is the newest idea to combat our current tepid global growth, but it’s a theory that’s been around since the 1960’s.  Basically, helicopter money means central banks rain down   money directly to individuals through tax cuts or government checks. Helicopter money can also include central banks spending on infrastructure investments to generate jobs that would stimulate demand.   

This idea has been debated by economists for years but never given a full test. The main criticism is people may not spend the money, choosing to bank it or pay down debt, which would fail to generate the desired growth or a healthy level of inflation.

Dead-end stimulus is basically why previous stimulus efforts, known as quantitative easing, failed. This stimulus was aimed at banks and companies, who didn’t use the cheap money provided by central banks to lend or spend enough to revive the global economy. And when stimulus fails a deflationary trend can take hold that drags down growth, as we’ve seen happen in the last year.

But the biggest harm of “helicopter money” is that it blurs the lines between what elected officials in Congress are supposed to do (fiscal policy) and what the central bank is supposed to do (monetary policy). And when a central bank abandons economics for politics it’s a recipe for disaster that could result in printing money without restraint.

It could create the type of crippling inflation that has stunted other nations, and that’s one reason why the U.S. Federal Reserve was set up as an independent entity. 

How is helicopter money even on the launch pad? The gridlock in Congress is starting to weigh on business leaders, and the helicopter money proposal would seem an end run around politicians to get things done. But it would come at too high a price. 

James McCormack, managing director and global head of sovereign and supranational group at Fitch Ratings, wrote recently: “Helicopter money would transfer risk from governments’ balance sheets to those of central banks, blurring the lines between policies, institutions and their relative autonomy.’ He adds that its appeal is in “being able to exploit the unique financial structures of central banks,” but it will undermine the integrity of those central banks, and so the soundness of money.

Janus fund manager Bill Gross recently said in a CNBC interview that renewed stimulus such as helicopter money from the Fed would lead to a less independent central bank, and a more permanent mingling of fiscal and monetary policy that has been in effect for over six years now.

But Gross argues the economy will be worse if helicopter money is not used. He said without it there would be “an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die.”

To date central bankers are choosing not to fly. The European Central Bank recently said it is taking “helicopter money” off the table, and the central bank of India doesn’t think people would spend the money, so it hasn’t pursued this policy.

We hope that the Federal Reserve takes the same stance. But with some presidential candidates advocating replacing non-partisan economists with political appointees, it could be the beginning of the end of the independent Fed.

If helicopter money proposals are put into place, which some believe could happen in the next year or so, Global Income Edge’s portfolio strategy would change to protect investors from a deeper and more protracted period of low rates and slow growth, and then possibly later, from income-eroding inflation caused by the unchecked printing of money.  

 

 

 


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