After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory.
The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus — a strategy known as deploying “helicopter money” after a 1969 proposal from Nobel laureate Milton Friedman.
Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a “very interesting concept.”
“We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics Ltd. in London. “The likelihood is reasonably high of some form being implemented somewhere.”
The theory — never attempted by a modern major economy — is to fuse monetary and fiscal policies now both running out of room. Cash-strapped governments sell short-term debt straight to their central bank for newly printed money that is then injected straight into the economy via tax cuts or spending programs. The usual intermediaries, like banks, are bypassed.
The idea is to spur spending and investment directly rather than influence bond yields or sentiment. Central banks can be saved from permanently underwriting governments by establishing growth or inflation limits.
In a 2002 speech that earned him the nickname “Helicopter Ben,” then-Federal Reserve Governor Ben S. Bernanke said taking to the skies would “almost certainly be an effective stimulant to consumption and hence to prices.”
Reviving the debate is the failure of inflation to accelerate in much of the world despite Bank of America Corp.’s calculation that as of early February central banks had cut rates 637 times and spent $12.3 trillion on assets since the financial crisis in 2008. It also estimated 489 million people now live in countries where rates are negative.
To Dalio, the founder of $154 billion Bridgewater Associates, that means the next step should be to do even more to spark demand.
“If you look around the world, our risk is not inflation and our risk is not overheating economies,” he told Bloomberg Television’s Erik Schatzker on March 3. “They’re going to have to go more directly to spenders.”
So what’s not to like? Critics say spraying money around would eventually mean Weimar-style runaway inflation and bloated government debt. The independence and credibility of central banks would be potentially damaged. And the policy could backfire if households sit on the money.
Bundesbank President Jens Weidmann has already said “helicopter money” would “rip huge holes in central bank balance sheets” and leave governments and taxpayers to “pay the bill in the end.”
Then there’s the law. The ECB is prohibited from financing states and lacks a single Treasury to work with, while the Fed is constrained in what assets it can buy.
“The helicopter option is simple, easily implemented and, for some, offers the closest thing to a free lunch,” said Stephen King, senior economic adviser to HSBC. “If this sounds too good to be true, that’s because it is.”
Draghi last week said that while the ECB has not studied the concept “it clearly involves complexities, both accounting-wise and legal-wise.” Colleague Peter Praet, nevertheless declined to rule it out as an option when asked.
The debate may remain academic. In the U.S., prices are shifting higher and the International Monetary Fund still forecasts inflation in advanced economies to accelerate next year to 1.7 percent from 1.1 percent.
Revisiting the Unimaginable
“I don’t think helicopter money gets rolled out quite yet,” said Ewen Cameron-Watt, chief investment strategist at BlackRock Inc. “You need a considerable downturn and further decline in inflation expectations first.”
Still, if economies do slide anew, Jonathan Loynes of Capital Economics Ltd. in London, noted central banks have shown willingness to revisit once-rejected ideas.
“The clear lesson of recent years has been that seemingly unimaginable policy measures previously confined to the theory or history books can become reality if extraordinary economic circumstances persist for long enough,” he said.
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