Keeping the Helicopter Grounded


By Tahir Wahab

Covid-19 has today created much hype around helicopter money, and the idea of flying the helicopter by making the central banks become the magic money tree is tempting..

Some economists say that central banks should fund the fight against the coronavirus by printing money and giving it to governments or other government-related agencies and state-owned enterprise like Air Mauritius. The reasons advanced for such a policy is that it would not need to raise taxes that much either now or in the future, nor would government debt need to increase; it is also a way of defeating deflation.

Helicopter-money can sometimes take different shapes and could be the purchase of zero-interest-rate government bonds that will not be repaid, either because they are perpetual bonds or because they are rolled over every time they mature. According to the conventional view, helicopter money is newly printed cash that the central banks distribute out, without booking corresponding assets or claims on its balance sheet. It can come in the form of cash transfers to the public or as the monetization of government debt. As Milton Friedman often said, in economics there is no such thing as a free lunch, and here in all possible scenarios this becomes a permanent loss for the central bank.

There are better ways to finance emergency packages to protect people and companies during pandemic lockdowns. So-called “monetisation” risks fuelling inflation and undermining economic discipline. It should be used only as a last resort.

All forms of monetary stimulus, from quantitative easing to negative interest rates carry risks. But helicopter money is particularly dangerous. Indeed, there is no realistic scenario in which such a policy could apply.

Undoubtedly, it’s crucial to get money to people in need. But before rushing to start the printing of currency notes, we should consider what the risks are in the long run.

First, it is inflation. Some may say with the economy crashing into a deep recession, there’s no risk of that. And it’s true that there’s no sign of inflation right now. While the prices of some basics like food may go up, the prices of commodities such as oil have plummeted. What’s more, if central banks create helicopter money, people will probably save much of it, rather than circulating it in the economy.

But what happens when the world comes out of Covid-19 hibernation?

Many people will leave their homes and spend their helicopter money. Now, unless the supply side of the economy can match at the same speed the demand, there might be less stuff to buy on the market. The combination of an increase in demand and a reduction in supply could boost prices. Whether this is just a one-off increase in the cost of goods, or the start of a new inflationary cycle depends on how forcefully populations push for increased wages and pensions to compensate for the price hikes in the future and how strongly governments and central banks would resist. 

Second, Friedman, who never suggested a cash drop as a serious policy proposal, imagined that it would be a “unique event which will never be repeated”.

The irony in today’s world is that, once governments discover how easy it is to fund their spending plans, it will be hard for politicians to put this genie-like magical habit of printing notes back into its bottle.

Additionally, politicians might not want to make tough economic choices and decisions if they can just turn on the printing press of central banks which in a word would be hyperinflation.

Of course, there’s absolutely no sign of that now. But hyperinflation along with the devaluation of money and massive dislocation of economies would be the result of continual monetisation wave within which Central banks would lose their independence and all economic discipline would be thrown to the wind. 

It would, of course, be possible to stop such an inflationary virus through harsh fiscal and monetary measures. But the longer that goes on, the harder it will be to suppress it. And even then, confidence within the banking system and credibility of governments would have been damaged, what with in addition the long-term costs. 

It is time to recognize, once and for all, that governments and not the central banks are responsible for generating long-term employment and growth, by ensuring favourable investment conditions, a high-quality education system, and open, competitive markets.

The coronavirus crisis is indeed terrible but governments should be able to fund the economy through less drastic means; quantitative easing remains a bazooka that is proportionate to the crisis as compared to helicopter money which is a weapon of mass destruction. Monetary policymakers and proponents should therefore ensure that the helicopters remain grounded.

Tahir Wahab is a Fellow of the Chartered Association of Certified Accountants, Chartered Banker, and holds an MBA with Specialisation in Strategic Planning

* Published in print edition on 24 April 2020

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