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Building a Ghost City Out of Helicopter Money

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There has been a lot of talk about helicopter money lately.

Last May, Janus Capital’s Bill Gross said structural changes currently occurring in the US economy will ultimately lead the Federal Reserve to adopt this extreme form of monetary policy. Last week, Federal Reserve Bank of Cleveland president Loretta Mester revealed helicopter money is indeed a possibility during an interview on ABC’s AM program:

We’re always assessing tools that we could use. In the US we’ve done quantitative easing and I think that’s proven to be useful. So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.”

Bernanke chopper_0

Japanese officials have been seriously considering helicopter money. It now appears they won’t go all the way, but according to a Reuters report, Japan may try a “soft” form of helicopter money:

Japanese policymakers, who won’t go as far as funding government spending through direct debt monetization, might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, say sources familiar with the matter. In the past week, Japanese markets have seen hyped-up speculation that the government will resort to using what’s called ‘helicopter money,’ where a central bank directly finances budget stimulus through programs such as perpetual bonds.”

While Japan appears to have backed off from the prospect of dropping helicopter money for the time being, it seems clear this monetary policy is in the future as central banks become more desperate, reaching for more extreme measures as the “conventional” approaches of lowering interest rates and quantitative easing fail to produce desired results.

So what exactly is helicopter money?

Obviously, government officials won’t literally drop money from the sky. The term was coined by Milton Friedman in his paper The Optimum Quantity of Money:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

An article in the World Economic forum explains the basic principle of helicopter money:

If a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target.”

In a nutshell, the central bank injects newly created money directly into the economy, bypassing banks and other financial institutions. The central bank buys bonds directly from the government to finance infrastructure, to “fund” tax cuts, or even to send checks directly to citizens.

Charles Hugh Smith explained how helicopter money works in an article on OfTwoMinds.com:

To avoid all the problems of ever-rising debt in a stagnating economy, the central bank creates money out of thin air and buys the government bonds with the newly created money. This is called monetizing the debt as new money is created out of thin to buy the debt. No tax revenues are needed, and so no sacrifices must be made to accumulate more debt. All the helicopter money is in effect free money because nobody has to pay anything for it. Monetizing helicopter money is like a perpetual motion machine: it’s a magical machine for creating free money the government can spend any way it likes.”

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In essence, helicopter money is quantitative easing on steroids. In fact, David Stockman says there really isn’t a significant difference:

The only thing different technically about ‘helicopter money’ policy is the suggestion by Bernanke and others that the treasury bonds could be issued directly to the Fed. That would just circumvent the dwell time in dealer (or ‘investor’) inventories but result in exactly the same end state. In that event, of course, Wall Street wouldn’t get the skim.”

The insidious thing about policy of helicopter money is that it puts the central bank in direct cahoots with the government. Suddenly, unaccountable central bankers have a say in how much debt the government runs up and how that money is spent. This will undoubtedly lead to an even faster piling up of debt – as if the government needs any help in that department. Stockman called it loathsome:

The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts. They would do this by agreeing to generate incremental fiscal deficits—-as if Uncle Sam’s current $19 trillion isn’t enough debt—–which would be matched dollar for dollar by an increase in the Fed’s bond-buying or monetization rate. That amounts not only to teaching children how to play with matches; it’s tantamount to setting fiscal forest fires across the land.”

Helicopter money is a higher dose of heroin for an addict becoming increasingly resistant to its favorite drug – monetary stimulus. First the central banks cut interest rates to super low levels. Then they went with quantitative easing. Next we saw negative interest rates. And yet the central planners are still struggling to keep the bubbles inflated. Next will come the helicopter money.

And then what?

Smith said it will create a ghost city:

The assumption here is that helicopter money will trigger a virtuous cycle of growth in stagnating economies: once this tide of new money washes over the economy, people will spend, spend, spend, entrepreneurs will start new business, corporations will expand production and this new expansion of activity will enable the state/central bank to withdraw the helicopter money. The problem with helicopter money is what I call the Ghost City Syndrome: helicopter money floods into a barren landscape and constructs a new city from scratch. The idea here is that the new city will magically attract residents, entrepreneurs, etc. But once the helicopter money is gone, economic activity drops to near-zero. The new city is a Ghost City: helicopter money did not launch a self-sustaining wave of new activity.”

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6 thoughts on “Building a Ghost City Out of Helicopter Money

  1. HenryR says:

    When your currency is based on less-than-nothing, and then everyone starts paying off their debts at the same time, you end up in the situation we are in now. We need a currency that is based on _something_ tangible. Pure copper would be far better than the currency we have now and it’s very cheap relative to gold or silver. So long as we have a Federal Reserve Bank which provides our Dear Leaders with unending streams of credit, our misery _will_ continue.

    This is a genuine sore spot with me. I know and understand the root of this nation’s problems, but I am unable to get anyone to listen to me. Hell, let the government print or stamp every dime needed from the cheapest materials available! Even that would be a vast improvement over what we have now. Right now, our economy and government have no fiscal contact with reality. Janet Yellen & Co. are drifting about in a sea of floating abstractions.

  2. Jim says:

    In Sept.2012,the Feds began QE3. This produced about 40 billion per month for a year and longer. (Money out of thin air!)
    The IRS web site says that about 100 million 1040 forms are received each year. If the Feds 40 billion per month would have gone to the 1040 tax payers, it would have been an extra cash check for $400 per month to each. The economic stimulation would have been palpable.

  3. FinanceDoc says:

    It’s called the Neutrality of Money and you can see it operating today. No matter how much money the Federal Reserve prints, real GDP does not improve. (Check out a graph of the Velocity of Money – it’s falling off a cliff). The additional money simply goes into higher prices and wages. Although the increase in inflation is currently being masked by an officially fudged CPI, families are feeling the very real effects of money printing on the prices they pay for rent, health care, food, tuition, etc. And wages are about to go up all across the country with increases in the minimum wage and knock on effects for those on higher rungs. But real growth in GDP is actually declining.

    You’d think the Economists at the Federal Reserve would recognize the Neutrality of Money in realtime and shape appropriate policy around it, but like the President and Congress, they will instead opt for the most politically expedient avenue.

  4. Brian Bey says:

    What I find troubling is that nobody is picking up how incompetent and naive Mester is reading through her statement. She “thinks” QE has proven to be effective????? In her view, helicopter money would “sort of” be the next step???? This woman is a Phd?? Let me ask anyone out there with a rational mind. Is this woman fit to be a member of the Fed. Is James Bullard or anyone for that matter??

    • Gerold says:

      The Fed-meisters have proven time and again that they’re neo-Keynesian idiots. The results speak for themselves.

    • agathon says:

      Brian, perhaps you don’t ‘get it’. The CB agenda is not yours. You are meaningless to them, except as a tool bit. You matter not. You are an abstraction in their models and agenda to prop up their banks and risk assets, lest the necessary deflation gains hold. They will play their hand until it is taken away. The Great American Sheep will mostly go along, then finally revolt due to some distraction, not even knowing the root causes. Let it go. Just get a case of popcorn and relax in your knowledge and decisions.

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