We already have helicopter money

There has been a lot of chat about helicopter money potentially being the next new monetary policy measure to be tried after all the others have tried and failed to stimulate the developed economies. I have just watched Professor Willem Buiter telling Bloomberg that it makes sense but won’t happen because of political opposition. But it seems to me we already have it, even though it hasn’t been announced as such.

To explain. Helicopter money as suggested by Buiter and others is, in his words, a fiscal stimulus (whether in the form of adding money to every bank account or in the form of infrastructure spending) financed not be issuance of government debt but by the central bank “printing” money. While this has not officially happened, it seems to me there is no real difference between quantitative easing and helicopter money. While some might argue that there has been no fiscal stimulus directly financed by a central bank, QE is financing fiscal spending.  The fact is the central bank is buying government debt. To argue whether the fiscal spending is “new” or not is sophistry. And whether this happens in the primary or secondary markets is really irrelevant – issuance finishes up with the central bank with the primary dealers effectively acting as passive intermediary.

Now, fiscal policy settings may not have been consciously altered, but to take the UK as an example, the Bank of England started buying assets (gilts) in 2009 when the UK government budget deficit was 10.8% of GDP. How can anyone argue that the Bank was not financing government spending in doing so, and thus creating “helicopter money”. Who knows what the fiscal policy setting would have been had the Bank not enacted QE? Presumably government bond yields would have been higher had they not done so.

Now, some will argue that the difference between QE and helicopter money is that QE is not permanent. The central bank’s holdings of assets are still part of government debt and will (or at least could) be sold back to the market at some point. The fiscal expansion is still treated as an addition to the budget deficit, even if the debt is bought by the central bank. But isn’t this really a fiction? I think it’s much more likely that the central banks’ accumulated assets will never be sold back to the market and will simply be refinanced on any maturity. In any case, this a decision that will be taken at the time of maturity, and I sincerely doubt anyone’s behaviour is assuming the sale of the Bank of England’s (or the Fed’s or the BoJ’s) stock of debt.

So yes, a fiscal expansion financed by the central bank buying government debt is not just a possibility, it is a possibility that has already happened. Whether central banks will be prepared to finance future fiscal expansion is unclear, but independent central banks may choose to do so if they feel it is in keeping with their mandate (usually of inflation targeting) which many think it is. Certainly, some on the ECB would be willing to expand QE to accommodate increased fiscal spending, and several have indicated that an increase in fiscal spending is desirable in some countries. However, the structure of the Eurozone makes it more difficult to enact there than elsewhere, where there are unitary fiscal authorities with single central banks. The Italian government debt level may still be seen as problematic even if a lot of it is owed to the ECB. The same is not true of the UK debt if it is owed to the Bank of England. I suspect the Bank will find a way to grant the UK government quite favourable terms.

 

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