Donald Trump has made reference to the notion of helicopter money
One of the wildest ideas to hit the US Presidential campaign trail might become a reality sooner than you would think.
Donald Trump, the Republican party’s nominee, has claimed that the US national debt, standing at more than $19 trillion (£13 trillion), does not need to be repaid.
“This is the United States government, you never have to default, because you print the money,” he declared live on air.
His comments signal his belief that America’s authorities, could, if they wanted, print enough money to pay back their creditors without raising an extra cent in taxes.
To many, Trump’s comments were startling. Yet, those familiar with the gyrations of central banks know that they contained more than a grain of truth.
The notion of helicopter money – having a central bank issue new money to pay for government spending – could also be used to finance the US deficit, and eventually, to fund a budget surplus that could pay down the national debt.
This idea – often associated with economic basket cases such as Venezuela and Zimbabwe – has until now been left untested in the modern era.
It may get such a trial next month, when Japanese policymakers meet to discuss their next salvo against deflation in June.
“There has been more and more talk about what central banks could do should a recession come”
— Toby Nangle
Japan’s central bank, which has already experimented with mass quantitative easing and negative interest rates, is viewed as being on the cutting edge when it comes to unleashing monetary stimulus.
George Saravelos, a Deutsche Bank strategist, says that “with Japan fast approaching the limits of its existing reflation project, it is a canary in the coalmine for the next global policy innovation”.
In reaching for helicopter money, some worry that Japan will have pushed too far.
“Over the past several months, there has been more and more talk about what central banks could do should a recession come,” says Toby Nangle, a Columbia Threadneedle fund manager.
Some central bankers believed that they could stimulate their respective economies by moving interest rates below zero. Nangle suggests that these moves have highlighted the problems with taking interest rates too low.
The lower rates go, the more tempting it will be for households to take their money out of banks, a privilege they may have to pay for, and instead decide to hoard it. That is unless governments choose to take extreme steps, like abolishing cash, in order to deal with the side effects.
Policymakers are looking for other options, and helicopter money, an idea popularised by Milton Friedman, the Nobel prize-winning economist, has come back onto the scene.
Central bank-issued money could be used to fund tax cuts or infrastructure spending in an attempt to boost growth.
The idea has burst into the mainstream, with former central bank officials openly discussing helicopter money’s use, while current staffers try to downplay the prospects of its deployment.
Money depends on the public’s trust in it, and Nangle argues that this trust can be “fragile”. Playing around with printing money, even where policymakers believe they have run out of other options, could be dangerous territory.
Central bankers, who privately recognise that helicopter money could be useful in a crisis, don’t want to alarm the public.
The same kind of concerns were voiced just before QE schemes were unleashed in the aftermath of the Great Recession. In some corners, investors were panicking, says Nangle, that inflation might go to 50pc or higher, as confidence in money was at risk of breaking down.
With helicopter money, the unknowns about how people might react are even greater. Under QE, central banks buy up government debt from the financial markets with newly created money, providing a boost to the economy.
This new money should return to the central bank like a boomerang as the government debt matures, or it is sold back to investors. The money supply does not permanently increase, although it may appear to, with repeated throws of the boomerang.
If the central bank becomes anxious that the economy is running too hot, and that inflation could get out of hand, it can sell the bonds it has purchased back to the open market to keep a lid on things. Helicopter money is more like “frisbee-money” than “boomerang-money”.
Once the money is out there, there is no simple way of clawing it back. “There is an unknown element in how this would affect households’ perceptions of money, and how it works,” says Nangle.
Central bank money-printing “might appear to be a free lunch”, says Karen Ward, an HSBC economist.
Without the constraints of having to raise taxes or borrow money to fund spending, the authorities might become profligate, it is feared. If households and investors do not believe that the use of helicopter money is a one-off, then they may lose faith in officials to keep the supply of money stable, and inflation low.
This chain of events can create a self-fulfilling rise in inflation, leading to a dreaded state of hyperinflation, where prices rise so quickly that it is hard for shops to keep up, and money and savings lose their value rapidly.
Ward says that “if markets suspect governments, rather than central banks, are in the driving seat on helicopter money they will suspect higher inflation”.
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If politicians are the ones in charge, then considering helicopter money could be “corrosive”, says Nangle.
The world’s resources are still finite, regardless of how money is brought into existence. Economists suggests that this is where you end up with soaring inflation, and a debased currency.
If consumers are not unnerved, then helicopter money might turn out to be relatively safe, in the same way as QE. Yet, while there are reasons to be hopeful that economies could be resilient in the face of helicopter money, central bankers, a conservative bunch by nature, may not want to take the risk.
Despite its association with unsustainable regimes, helicopter money, although it did not go by the name at the time, was used extensively by developed economies before the Second World War.
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Saravelos argues that it helped Japan to “escape the Great Depression with minimal economic damage compared to Western peers”.
For Trump, the idea should have little going for it. The US economy is if anything running too hot, rather than too cold, which is why the Federal Reserve has begun to raise its interest rates in an effort to cool things down. Increasing the money supply in the volumes necessary to avoid having to pay back debt with tax money could knock the US recovery off course.
In Europe, the prohibition of financing deficits with central bank-printed money is enshrined in law. All EU member states are forbidden from engaging in the practice. However, the Bank of England may be allowed to go ahead, if the need ever arises, should voters opt for Brexit on June 23.
That need may be just around the corner. While economics can tell us much, the profession is notoriously incapable of predicting recessions.
Ward says that global growth is already disappointingly weak, and that it “wouldn’t take much of a shock to the system to disturb this precarious calm”, once again creating the need for central banks to step into the breach.
Starved of other options, monetary financing could be an appealing response. After the dust has settled on the US Presidential race this November, Trump might find himself in a position to start printing money after all.