Does the coronavirus mean it’s time for helicopter money?
Central banks are running out of tools to battle the severe economic consequences of the coronavirus pandemic. We examine whether helicopter money is a viable option and what it could mean for markets.
What is helicopter money?
Helicopter money is a term used to describe an unconventional monetary policy that involves a central bank printing more money and distributing it directly to people.
The idea was forged in 1969 by economist Milton Friedman, who used the image of a helicopter flying over and dropping money to people below to depict the effects of monetary expansion.
The concept of helicopter money is to make a one-off distribution of newly printed money directly to citizens in order to boost consumer spending and make them more financially secure so the economy can recover during a recession.
Read more: Everything you need to know about recessions
There are many different ways that helicopter money can be distributed, but the core idea remains the same: people receive a one-off payment from the government that doesn’t need to be paid back.
Helicopter money has rarely been used in the past and is not an option that major central banks consider a realistic option most of the time. But now, in the unprecedented times ushered in by the coronavirus, some believe it is time for this decades-old idea to come to fruition.
What is the argument for helicopter money?
Many of the arguments in favour of helicopter money lie in the lack of success of other, more mainstream alternatives, especially since the last financial crisis.
The typical toolbox of central banks to keep the economy on track is looking exhausted, and therefore many believe it is time to consider more unconventional policies such as helicopter money.
When the global economy collapsed in 2008-2009, central banks began to lower interest rates so it was cheaper for people and businesses to borrow money in the hope they would then spend more.
But interest rates can only go so low. For example, the Bank of England (BoE) quickly slashed its rate from 5% to 0.5%, and today that stands at 0.1%. The European Central Bank’s (ECB's) rate is now at the lowest level on record and on the verge of entering negative territory, while Japan, Denmark and Switzerland already offer negative interest rates – which effectively means they are paying people to borrow money.
Therefore, as the wiggle room on interest rates dwindled, central banks began using quantitative easing (QE) to help spur on the economy. QE also involves printing additional money but instead of distributing it directly to people it is spent on government debt in the form of bonds.
This also makes it cheaper for people and businesses to secure loans, again in the hope they will spend it. It also hopes that buying government bonds from other organisations, like pension funds for example, will give them cash that they can go on to spend or invest, generating a higher return and growth. Trillions has been spent by central banks on QE, seeing their balance sheets balloon.
But, despite the sums spent trying to revitalise the economy and record-low interest rates, the economies of most countries are still not on the right path – and many are now questioning what else central banks and governments can do. Worryingly, concerns that central banks were running low on options were already ripening before the coronavirus pandemic came around.
‘There is not enough monetary policy space to deal with the next downturn: The current policy space for global central banks is limited and will not be enough to respond to a significant, let alone a dramatic, downturn.
Conventional and unconventional monetary policy works primarily through the stimulative impact of lower short-term and long-term interest rates. This channel is almost tapped out,’ said BlackRock, one of the world’s largest investment managers, in August 2019.
Therefore, the argument in favour of unconventional policies like helicopter money have grown as central banks look for ways to manage the economy, and that has grown stronger as the coronavirus pandemic has unfolded.
Instead of placing hopes on reducing the cost of debt, the hope is that one-off payouts directly to citizens can encourage an economic recovery and inflation. Central banks have the flexibility to dictate the size and scope of any helicopter money being distributed to achieve the desired goal – such as the ECB’s inflation target.
What is the argument against helicopter money?
There are criticisms of giving away free money to people and there are knock-on effects that would have to be taken into account.
Some argue that helicopter money isn’t free because of the devaluation it causes to the country’s currency. This impacts foreign investment, reduces the country’s buying power and hurts savers. But this also applies to QE. The same applies to the risk that helicopter money could inadvertently cause too much inflation.
There are also questions about whether giving away free money will translate to higher spending, or encourage spending in the right areas. People who don’t need it may save it. People may use the money for illicit items.
There is also an argument that committing vast amounts to helicopter money could limit the central banks options in the future should it fail. If widely adopted, some fear that it could fall prey to politicians, who would could seek to take advantage of what would undoubtedly prove a popular policy among voters.
That also brings into question the independence of any central bank as helicopter money is, in theory, something that is carried out in conjunction with the government, unlike QE, which is carried out at the behest of the bank alone.
One of the main barriers to the adoption of helicopter money is that it is unproven. Only a handful of countries have tried it and mostly on a small scale with mixed results. However, more countries than ever are starting to use helicopter money in one shape or form as a way to battle the coronavirus.
Has helicopter money been used before?
The most cited example is in Japan. The 1990s is described as the ‘lost decade’ for Japan’s economy. The economy had stagnated and was suffering from deflation so, in 1999, the country decided to distribute around ¥20,000 (or $200 at the time) worth of coupons to every child and many elderly people in the country to try and encourage consumer spending, which helps battle deflation and encourage inflation.
The coupons had to be spent within six months. The slew of studies on its effects agree that it did encourage those people to spend more but there is debate about its impact on Japan’s overall economy.
Quite simply, the results of Japan’s coupons are underwhelming and pocketed with flaws. For example, they were only distributed to around 15% to 25% of the population, and at a time when it was also carrying out QE, which makes it difficult to decipher the impact of each individual policy.
Still, some countries are trying their own forms of helicopter money today, and one is trying to do it on a larger scale than ever before. Hong Kong announced in February 2020 that it was handing out around HKD10,000 (around $1200) to every one of its adult citizens as a way of reviving an economy besieged by political unrest and the coronavirus.
Macau in February decided to distribute vouchers instead of cash to its citizens to try and ‘revitalise consumption’, and Singapore followed in April 2020 by announcing it would make one-off cash payments equal to around $600 to all adults in the country and signalled further payouts could be made again in the future.
This handful of examples demonstrates the different ways that helicopter money can distributed to people, and how some are trying to overcome the risks. Japan has shown there are ways to target the right people and ensure it is spent in the right places and at the right time by using coupons.
Does the coronavirus crisis mean it’s time for helicopter money?
A recession was already on the horizon before the coronavirus outbreak began. The economy had been growing for over a decade but was beginning to slow, and central banks were already pondering how to respond to the next downturn considering how limited their options are.
The pandemic will simply bring the recession forward. A recession is technically classed as two consecutive quarters (or six months) of contraction, and that looks like a high possibility for most countries considering the world has yet to get a handle on the virus after four months.
The success of any helicopter money programme will come down to the finer details: such as the size, the distribution method and the timing. Helicopter money is regarded as a way of helping a country escape a recession at a quicker rate rather than as a way of preventing one.
Although governments could make several payments to the public, there is a huge challenge in getting the right amount to the right people at the right time.
BlackRock argued last year that a plan outlining how helicopter money would work would already have to be drawn up before the next crisis.
‘The effectiveness and market implications of such a policy framework would depend on whether it is implemented well in advance of the next downturn. If it were, it would increase the chances of the framework being well understood by the markets, underpinning its credibility and efficacy’, it said. This suggests that central banks might not be willing to take such a radical turn in policy direction because of fears it would rattle financial markets as it is unproven and not well understood.
As demonstrated by the few countries that are trying the policy out in 2020, there is no consensus on how to introduce helicopter money effectively.
But the more countries that begin experimenting with helicopter money, the more that will follow. Some of the knock-on effects of helicopter money, such as devaluing the currency, won’t be as harsh if other countries are also doing it.
And, unlike a normal financial crisis spurred on by a pocket of fault somewhere in the global economy – and when fingers are usually pointed – the coronavirus crisis means countries are in the same boat and (largely) uniting against the invisible enemy.
Another challenge will be getting the timing right. Usually, you would expect helicopter money to be used during a recession but they will also have to take the timeline of the virus into account.
A country may be at the right stage of a recession to introduce helicopter money but far away from having the virus under control. This would mean giving away free money to people at a time when much of the economy remains closed or when it is actually best for people to stay indoors rather than go out shopping.
That is especially true considering many of people’s favourite places, like pubs, restaurants and leisure facilities, look likely to be the last to reopen as they rely on large gatherings of people.
Economically, there will be a desire to encourage people to go out and spend, but health wise, there will be a greater urgency to keep people at home. This means helicopter money would only be effective if it was introduced after the coronavirus is under control and the economy has reopened.
Will the ECB or the Fed use helicopter money?
If they don’t use helicopter money to respond to this crisis, they will undoubtedly start to look at the concept as a potential idea for the next one.
ECB president Christine Lagarde recently said that the central bank has ‘never discussed the issue of helicopter money’ – so it is hard to see how it could be seen as a viable, well-thought-out idea that could be introduced anytime soon. However, some have suggested the ECB could look at helicopter money if there is a risk to price stability – which is the bank’s central aim.
The Federal Reserve (Fed) continues to flirt with the idea. It has already started to try to introduce direct payments to low- and middle-income citizens, suggesting it is far more willing to experiment with helicopter money than the its European counterparts.
It also appears to be a rare area that both the Fed and US President Donald Trump see eye to eye, with the president insisting his signature is on the cheques. Receiving money through the post and signed off by the president can only benefit Trump’s campaign for re-election this year.
What about universal basic income?
Going a step beyond helicopter money leads you to universal basic income. The idea was actually introduced two years before Friedman wrote his piece on helicopter money, and again is a long-touted but seldom tried concept that could gain popularity in the current climate.
Universal basic income involves paying citizens a guaranteed income every month, regardless of their financial situation. For example, the BoE could pay every adult Brit £1000 per month with no limitations on how or when it is spent. The obvious challenge is financing such a programme as it would have to come out of the public purse, but the benefit is that those that need it would be able to procure the necessities they need in life, like food and shelter, while others would have more money to spend or invest. Unlike a one-off helicopter payment, universal basic income is a guaranteed recurring payment.
No country in the world currently pays universal basic income to its citizens, although it has been trialled in several countries, most recently in Finland in 2019. Again, the theory would work better if multiple countries adopted it together rather than one trying it alone, and it is unlikely any country would try universal basic income before they have even had a go at dishing out helicopter money.
However, the argument for universal basic income has never been stronger amid the current crisis. Even once the pandemic is over, the economy will still have to deal with aftermath. Unemployment is rocketing and the millions of people that have been furloughed have no guarantee that they will have a job to return to in the long run. There is an argument that people will need long-term guaranteed financial support, such as universal basic income, rather than an ineffective one-off payment using helicopter money.
What would helicopter money mean for markets?
The impact of any central bank introducing helicopter money would depend on the circumstances. One country going it alone with a large programme would have different effects compared to several major economies doing it at the same time.
Giving out cash would encourage different spending habits to coupons. The timing, taking into account both the stage the economy is at and the stage the country is at with the coronavirus, would also be pivotal.
Still, there are some obvious possibilities to watch out for. Currency markets will move as new policies are introduced. Printing more money dilutes the cash already in the hands of the public in the same way a company dilutes existing shareholders when they issue new shares in the business. Announcing such a policy would undoubtedly spark movements in the forex market.
If it successfully encourages consumer spending and an economic recovery, then the desire for safe haven assets will give way to riskier assets. This would mean assets such as gold would decline in price, while assets such as growth stocks would become more appealing. Plus, if it spurs on inflation as intended then this usually draws attention away from dividend-paying stocks that are popular when inflation is low. This means any large-scale helicopter money programme could prompt a change in appetite among investors.
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