Krishna Koundinya Mothukuru

Drawing the distinctions between QE and Helicopter Money

The Essential difference between QE and Helicopter money is ‘who spends the money’. In QE, it is the government who spends the money while in Helicopter Money, it is the consumer.

When Milton Friedman proposed Helicopter Money, he said that it was a ‘one time’ act, but added a caveat that it is unlikely that the proverbial helicopter would fly only once. It creates an illusion of prosperity.

There is an opinion that Helicopter Money should be made long term. This will not only create disposable incomes, but will also increase the inflation expectations by the people. Central Banks use inflation expectations for deciding their monetary policies. With surplus cash, inflation expectations will be higher and consumers would be driven to spend immediately, rather than to save money for the future.

Even for QE, the Federal Reserve directly communicated that the expansion in the monetary base via QE is temporary. It planned to return to the pre- QE monetary base trend after some time, which was committed to not increase the inflation target. A long term QE would imply that artificially enhanced monetary base would result in hyper-inflation, which was against the target set. Aggressive QE by the Federal Reserve and other central banks over the years led to excess risk taking and spawned asset bubbles. Considering the talks surrounding Fed Tapering, which discourages risk taking and can be seen in the voices of central banks of developing nations, especially India asking for more consideration, since that dries up FDI and FII and keeps these economies in motion. When QE dries up, sharp asset price corrections would lead to another major blow to the world economy enveloping both developed and emerging markets.

On the other hand, Helicopter Money tries to resume growth by directly stimulating the aggregate demand instead of indirect asset price inflation and non-judicious risk taking. This saves the world, a few bubble bursts.

Around the world, there is an understanding that fiscal and monetary policies must be strictly separated. This is enforced by the institutional setup of different economies. This is done to prevent the one-man-show by Central Banks or Governments. Helicopter Money blurs the stark distinction to some extent in the long run. Central Banks will have to reluctantly accept their increasing role in monetizing, become less autonomous, thus leading to an intermingling of monetary and fiscal policies. It transfers the risk balance sheets of the Government to that of the Central Bank. Already reducing fiscal deficits is not a priority for Governments (at least in the short term) and improving monetary policy frameworks to reduce the liquidity traps is not pursued enthusiastically (notable exception in recent past is India which will constitute a Monetary Policy Committee curbing the powers of the Central Bank Governor).

Helicopter Money demands greater coordination between the two pillars and may become the only means to stimulate nominal demand by monetizing fiscal deficits. But, there would be limits beyond which the financial integrity of the Central Bank and monetary system of the economy may be questioned, but identifying this in advance would be very difficult, if not impossible.

One more notable difference between QE and Helicopter Money is that, the version of QE that we have seen actually exacerbated the inequalities present. The ever widening gap between the rich and the poor has accelerated with the QE since it works on ‘trickle down’ economics in which most benefits are siphoned off by those closer to the source (i.e the wealthy), depriving the masses of much needed credit. Helicopter Money, at least in this regard is more egalitarian in its approach and democratic in character, since the benefits are more equitably distributed. QE goes to the businesses first and then to people, while Helicopter Money brings armada of Black Hawks into the streets stuffing bundles of cash into unemployed and underemployed people’s accounts. It can also be argued that QE is more of monetary policy tool and Helicopter Money has a fiscal character (a synergetic integration of fiscal expansion with enhanced QE seemingly goes around the Ricardian Equivalence- consumers don’t internalize the budget constraints of the government anymore and no fear of tax increases, which boosts consumer spending).

Another point of divergence is that Helicopter Money is irreversible. Once committed, the Central Bank essentially becomes the ‘Robin Hood’. Governments are committed to newly issued money and distributed money cannot be taken back unlike inflation rates which could be increased on a whim, and bonds which can be sold anytime in the markets. If it is not irreversible, then inflation expectations of people will affect the consuming patterns, leading to the failure of Helicopter Money.

This is the 2nd part of a 3 part series

 Krishna Koundinya Mothukuru is an entrepreneur and writes on Foreign Policy, Economics and Law.

Posted by The Indian Economist | For the Curious Mind