scorecardresearchHelicopter Money: Is this a double edged sword that triggers inflation?

Helicopter Money: Is this a double edged sword that triggers inflation?

Updated: 22 Aug 2022, 04:51 PM IST
TL;DR.
The helicopter money expands the available money in the economy, which raises inflation levels or lowers the value of the national currency. The goal of this unconventional monetary policy instrument is to revive a sputtering economy.
The goal of helicopter money, an unconventional monetary policy instrument is to revive a sputtering economy.

The goal of helicopter money, an unconventional monetary policy instrument is to revive a sputtering economy.

Picture a scene: A faint noise from the sky. It’s an aircraft of some sort but it’s far away. The sound is getting nearer to you and louder. It’s a helicopter. Now, as human tendencies go – no matter how many times you have seen a helicopter or any aircraft for that matter – you will look up to see it one more time. But this time, something's different. The helicopter is right above your head and it has stopped moving. 

What’s going on, you wonder? Will some ropes fall and elite commandos suddenly start rappelling down? Oh wait, it’s money! The helicopter is showering money on you. Free money. Unlimited money. So much money. Finally, all your troubles will be over. You are rich!

In the simplest of terms, this 'helicopter money' that you can use to reduce your money problems and spend your way out of your troubles has been a lifelong dream of many. However, central banks and governments have been able to make it a possibility. The catch? Unlike the dream, in reality, helicopter money brings with it a host of problems – inflation.

Now, the serious part.

From the dream above, we can clearly define helicopter money as a transfer of money from the central bank to the people through the government. According to the helicopter money theory, if money were given to people, it would raise their disposable income – which is the money people have to spend. This will ultimately result in an improved economy which means more jobs and prosperity all around.

The goal of this unconventional monetary policy instrument is to revive a sputtering economy. In a nutshell, it refers to a helicopter dropping a large sum of money. To shock a struggling economy out of a severe downturn, American economist Milton Friedman coined this phrase to describe "unexpectedly throwing money over it."

Do you remember anything of this sort from your recent memory?

No? Think, think.

Still, no?

Fine.

Remember how the US paid its citizens $600 per month to help them tide over job losses caused by COVID a couple of years ago? The nearly $1 trillion that the US spent to get its people and economy back on track from the crippling COVID-led shutdowns? That ‘stimulus’ was a form of helicopter money.

And what’s happening now in terms of inflation in the US is the aftermath of such a policy.

Inflation

Now, in June this year, inflation in the US reached its 40-year high of 9.1%! Now of course there are multiple reasons for this inflation in the US, like the Russia-Ukraine war that has led to a shortage of food products and a rise in oil prices, but the helicopter money also added to the problem.

The US dollar, as explained in this Morgan Stanley blog, has weakened a lot over the past few years. As per Investopedia, The depreciation of the US dollar accelerated into 2022 as inflation picked up, impacting both domestic and international investments in the country.

Now, why did inflation pick up? Very simply, stimulus cheques of $600 meant people had the money to spend and they did spend. The demand and price economics mean if the demand is rising, the prices of the products also rise. And what happens when the prices rise? Inflation.

How is it different from quantitative easing?

Now after reading this, a similar term, quantitative easing, might cross your mind. Yes, you’re right, quantitative easing has frequently been confused with helicopter money. Although both are monetary policy instruments that increase the money supply, their effects on the balance sheet of the central bank are distinct.

The central bank purchases government assets from commercial banks and other financial institutions to create reserves for quantitative easing. Helicopter money, in contrast, entails disbursing cash to the general population and does not result in an increase in the assets listed on the balance sheet of the central bank. In essence, quantitative easing expands the money supply by buying government assets, whereas helicopter money expands it by delivering money to the general population.

We can conclude by saying that helicopter money is like a two-edged sword which expands the available money in the economy and results in either increased inflation levels or depreciated value of the national currency.

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First Published: 22 Aug 2022, 04:51 PM IST