Wednesday July 06, 2022

Helicopter money

March 18, 2020

We are in a crisis. The health panic will be followed by an economic panic. People will stop going out, stop shopping and dramatically reduce spending.

This will have an immediate impact on cashflow. Without cash, businesses will go bust. Without cash, suppliers don’t get paid and they in turn can’t pay their creditors. The knock-on effect will be swift. Tax revenue will seize up. In addition, businesses without cash can’t pay their employees who will have to be laid off. This will exacerbate the slump.

Unfortunately, as cashflow dries up, those with cash will hoard it. Hoarding is the natural reaction to a panic – witness what is happening right now in supermarkets. The same will happen with cash. As more and more cash disappears from balance sheets, more and more cash will be hoarded. In fact, as always happens in a panic, more cash will be hoarded than is actually needed for the rainy day. That’s human nature; we overreact when panic sets in. There will be a run on cash as businesses try to stay open.

So what should we do, when faced with a cash drain, prompted by a sudden slump in spending?

Here in Ireland, the Central Bank of Ireland should print money and deposit free cash into every citizen’s account and every business account.

This is exactly what Hong Kong did in February. It is called “helicopter money”. It was first suggested by Milton Friedman when asked what central banks should do when faced with a deflationary shock like the one we are facing. Friedman argued that once inflation is below expectations, there is ample scope to print money.

In addition, the “normal” way to do this was through the banking system. This is what QE was all about in 2010. The central bank “gifts” cash to the strapped banks whose balance sheets are encumbered with bad assets. The banks in turn lend this money out to businesses and people who need it. Using banks as middle-men is a rather cumbersome way of getting cash into people’s hands and has more to do with saving the banks that reigniting the economy.

Friedman argued it would be better to simply give people money by crediting every account with a certain amount. Once money is in accounts, the panic abates, the hoarding stops and everyone gets paid as normal. Stop the panic by stopping the source of panic.

In February, in the face of the coronavirus, the Hong Kong government instructed the central bank to deposit into each of the city’s permanent residents (aged 18 or over) HK$10,000 – or roughly €1,142 – to buoy the local economy.

It seems too simple, doesn’t it? That’s because it is. Such is the alchemy of central banking. Once inflation is low, the central bank can just print the stuff. The reason it is called helicopter money is that it is like a helicopter drop of money out of the sky into people’s accounts.

Excerpted from: ‘Central Banks Must Give Everyone Free Money. Rght Now.’