Is now the time for helicopter money?

In recent years the term helicopter money has resurfaced, as Europe struggled with economic growth and negative interest rates failed to spur inflation. Economist and Nobel Memorial Prize winner Milton Friedman coined the term helicopter money in 1969. Economists and market commentators have very often used the term to explain a number of policy measures taken by governments and central banks to assist ailing economies. However, the main idea behind helicopter money describes policy makers handing payments directly to individuals. While from an individual’s perspective this may seem appealing, from a policy point of view this option is very often a last resort.

The term has once again gained prominence in recent months as the world all over fights the health and economic consequences of the pandemic. For decades monetary policy has been the go to policy for central banks to manage peaks and troughs in the economic cycle. In simple terms, when the economy is booming, central banks employ a contractionary monetary policy and when an economy is slowing down policy makers opt for an expansionary monetary policy. The latter involves an increase in money supply and lower interest rates. The rationale is that lower interest rates and hence more money in circulation, will encourage spending, consumption, investment and reduce unemployment.

The developed world is no stranger to low interest rates. Central banks’ policy decisions at the heights of the last global financial crisis heralded the way towards the low interest rate environment we are in today. With the benefit of hindsight we can easily say, that the decisions back then were inevitable, as central banks strived to shore up confidence in financial markets and make the cost of borrowing cheaper than ever before. Whether the massive quantitative easing programs and low and negative interest rates policies were the best options, is another topic and beyond the scope of this article. Yet, evidently not everyone emerged a winner.

Savers were among the hardest hit, while income investors were encouraged to add risky assets and duration in their portfolios, as low risk assets and short-dated investments generate very low returns. In addition, quantitative easing has contributed towards wealth inequality, as asset owners or investors with assets quoted on stock exchanges, benefited from the accommodative monetary policy. Low interest rate environments are usually supportive of higher equity prices. In the midst of the pandemic, central banks added equities and corporate bonds to their list of asset purchases, making it even more likely that wealth inequality increases further.

Therefore, while asset purchases helped to increase confidence and elevate economies from a deep recession, by no means did the policy reach all individuals and business owners. While financial markets performed exceptionally well, economic growth increased and unemployment declined, the policy still failed to meet the much important inflation target objective.

Helicopter money feeds payments directly to all individuals and businesses with the intention to encourage spending. Similar to quantitative easing, helicopter money aims to inject money in the economy and it can take various forms. One main difference is that helicopter money directs payments directly to business owners and individuals, while quantitative easing channels money through the banking and financial systems.

In recent weeks various governments have resorted to financial aid programs aimed to assist businesses and employees in the hardest hit industries. As interest rates reached ultralow levels, and in some economies even negative, policy makers have little ammunition to fight the economic problems which this pandemic brought about. Many agree that assistance should be given to businesses and employees in vulnerable sectors. This aid aims to encourage companies to go through these difficult times while encourage them to keep their employees on their payroll. Whether rolling a full program to all households in a country at this junction, is difficult to tell.

Timing its introduction is paramount. Before rolling out and advocating in favour of helicopter money programs to households, we should keep in mind that in the midst of a pandemic, people might hoard cash and save it for a rainy day. This will reduce the positive impact that the policy intends to have on the economy. Another more important factor is health related. Transferring money to households to spend at a time when many health authorities globally are advocating social distancing, might defeat the purpose if individuals put down their social distancing barriers and infections remain elevated.

In this economic environment, where interest rates are at rock bottom levels, the traditional tools left at the hand of policy makers to combat the negative economic impacts brought by this pandemic, are scarce. A timely and limited program of helicopter money will give the world economy a well needed boost when it is safe to do so. A nation’s health and supporting the hardest hit sectors should be a priority now. Once the hurricane is over, and the world out there is a safer place, governments should inject liquidity directly in peoples’ pockets. An unconventional measure, with its own risks, which will reach the masses and possibly leave the desired effects on the economy.

Gabriel Mansueto is the Head of Investment Advisors at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]