“Helicopter Money”, the metaphorical term coined by economist Milton Friedman in 1969, has gained momentum in the discussion of what the BoJ’s next strategy may be.
While there is no clear consensus on how Helicopter Money should be implemented, in theory it is the strategy of providing money directly to the private economy to boost consumption, therefore fuelling economic activity. It therefore circumvents the current issue: that money given to financial institutions through asset purchases does not enter the real economy.
So far, Governor Kuroda has strongly refuted the idea of Helicopter Money, pointing to the fact that it is currently illegal under Japanese law. However, an ongoing poor performance of the Japanese economy have led economists and analysts to believe that it is an option they need to seriously consider.
Mark Mobius, executive chairman of Templeton Emerging Markets Group, said in an interview with Bloomberg that he expects Kuroda to implement helicopter money as soon as next month. The benefits the new unconventional policy is aiming to achieve are clear to most, stimulating consumption by handing money directly to market participants.
The dangers, however, are more widely debated.
Raghuram Rajan, India’s central bank governor, been prominent with his criticism of the strategy. The first issue is the lack of control the Central Bank has over real money supply, as base money is expanded through the functions of financial institutions. Therefore, no one can fully predict the consequences of a release of fiat money into the private economy may have on money supply in the long term. In the worst case scenario, it could lead to hyperinflation as seen in Germany in the 1920s.
Secondly, many assume that helicopter money will involve the BoJ giving more money to the government to distribute through fiscal policy measures, without an expansion of government debt. This bears the risk that the government will use this new power for political means, overstimulating the economy before elections, and targeting money for political purposes.
Lastly, Rajan points out that Helicopter Money may, exactly like current measures, not ever fulfil their prime purpose – that of increasing consumer consumption. Helicopter Money as a policy communicates to consumers and investors that the BoJ is handing out large amounts of free money and, given the possible negative consequences outlined above, consumers which receive the cash benefits may be more inclined to save the money, rather than spend it, due to an uncertain economic future.
Therefore, Helicopter Money may have weaknesses on both sides of the spectrum. On one it may lead to unintended overshooting of targets and therefore hyper-inflation and on the other hand, it may lead consumers to save more instead of less and strengthens current deflationary trends.
However, the success and side-effects of Helicopter Money will likely depend on the way it is implemented – opinions on this vary greatly.
One idea, which former Fed Chairman Ben Bernanke advocates, is to give controlled amounts of money to the government for investments in infrastructure. In this way, the money would reach the economy in form of higher employment and wages for workers in infrastructure sectors instead of free uncontrolled money to consumers or the government to spend as they wish. It would then create demand for construction firms to expand and invest, and reach consumers through higher incomes.
While this strategy may seem one to engage with further, one big issue remains.
Some factors always lie outside of the control of the government of central bank and artificially inducing liquidity to the market without a foolproof strategy to absorb it again if necessary can be very dangerous.
We have seen cases where adding liquidity to the market has far overshot targets and lead to dire consequences.
When the United States began quantitative easing, shortly after the global financial crisis, many emerging economies struggled to keep their currencies from appreciating greatly against the dollar. Especially Brazil used vast amount of resources to induce liquidity in their own market to keep the Brazilian Real down. When however, the United States successfully ended its expansionary policy measures and successfully managed to soak up excessive liquidity in in 2013 and throughout 2014, the Brazilian authorities were not able to do the same and the Brazilian Real went into freefall.
With the current debate as to whether the Fed will hike interest rates any time soon, there is once again uncertainty about future strength of the dollar. Should Japan increase the money supply through more new, unconventional, and not fully understood measures, a rate hike and following appreciation of the dollar may have terrible consequences for the Japanese economy.
Therefore, any future measures the BoJ will adopt, largely depend on the level of control they are able to assert over the money supply it creates. The benefits of Helicopter Money, should it ever come to play in practice, will depend on the way it is implemented.
Katharina Fleiner 26/08/2016
