What is the definition of Helicopter Money?

What is Helicopter Money?

The term Helicopter Money refers to all those policies aimed at the direct transfer of money into the pockets of citizens in the hope of reviving an economy in a recession when not even interest rates close to zero are able to provide a stimulus.

It was the famous American economist Milton Friedman in 1969 who introduced this concept by referring to a helicopter that was supposed to launch banknotes from the sky.

Citizens’ spending will then translate into an increase in the demand for goods and services.

The dangers associated with the use of Helicopter Money consist in the risk of hyperinflation and a devaluation of the currency.

Furthermore, if the demand for goods and services were to go abroad, an imbalance in the trade balance would arise.

Helicopter money = Quantitative Easing?

Helicopter money is an alternative technique to the quantitative easing (QE) strategy.

As mentioned, both strategies aim to stimulate consumption to raise the price level through inflation.

While helicopter money increases the amount of money in circulation by distributing large amounts of money among citizens, Quantitative Easing increases availability by purchasing government bonds or other financial securities to drive economic growth.

An example of helicopter money

A state with little or no growth could consider a helicopter drop.

Japan, for example, tried to use it in 2016 to boost its state’s economic growth.

Faced with this possible choice, the financial markets did not wait and immediately expressed concern with a view to a drastic choice of this type; the fear was that of hyperinflation and excessive devaluation of the currency.

Faced with this danger, the Bank of Japan (BOJ) opted instead for an alternative plan to increase the mass of money in circulation: it agreed on various agreements for the purchase of government bonds and other financial instruments, investing huge amounts of money infrastructure and at the same time raising public spending by providing subsidies to families with a low-income threshold.

What’s the merit of helicopter money?

Helicopter money does not derive from the use of bonds and loans to revive the economy, so it does not increase debt and interest rates tend to remain unchanged.

As a rule, helicopter money pushes spending and the increase in economic activities more effectively than quantitative easing because it increases the demand for goods and services, in a sudden and considerable way.

On the other hand, an increase in liquidity connected to the debt contracted by a State can be negative and retaliatory as the debt will sooner or later have to be paid in cash or with further debts to which compound interest could be added, it is not like with direct liquidity that can immediately push the helm of the economy forward.

What’s the demerit of helicopter money?

This type of procedure with respect to quantitative easing is a non-reversible strategy and many believe that it is not a correct and sustainable maneuver to advance and accelerate the economy of a country.

A state’s central bank sets its own interest rates to hit targets in order to drive economic growth.

In contrast, a helicopter drop does not allow the central bank to use interest rates to cut costs, as liquidity is not represented by a specific asset, but the instrument is distributed directly into the hands of citizens.

This practice, however, could lead to hyperinflation and problems for the monetary policy of the central bank and therefore for the public but also private finances.

One of the greatest fears is that an uncontrollable mechanism of the devaluation of the local currency could be triggered and then impossible to stem with maneuvers on rates.

The greater the currency minted and placed in the hands of the people, the greater the danger of it devaluing and losing its purchasing power also against other currencies.

It follows that first of all the big investors and then also the speculators have no incentive to believe and therefore to buy more of this national currency.