Buy shares in helicopters. Come the next recession, governments are going to need to buy huge fleets of them to distribute the cash they are going to be printing in order to stimulate the economy. That, at any rate, is metaphorical interpretation of Deutsche Bank’s suggestion this week that central banks may be forced, when next faced with a downturn, into the unconventional device of ‘helicopter money’ – where a government effectively distributes free money among the population in the hope of stimulating demand. What else can they do when interest rates – the usual method of stimulating the economy — are already at rock bottom rates? Last time around, of course, we had Quantitative Easing (QE) – effectively creating digital money which is then used to buy up government bonds and cancel them. But that the effect of boosting asset prices more than it stimulated the economy, and as a Standard and Poors report from 2016 observed, among others, had the unfortunate side effect of enriching the already wealthy.
So why not, then, simply distribute cash straight into the pockets of those on modest incomes – people who can be relied upon to spend it rather than squirrel it away in property and the like? Why not indeed? First, a mea culpa. I was one of many people who thought that QE would rapidly lead to disaster. Printing money, I assumed, would have the same effect in Britain as it had in Robert Mugabe’s Zimbabwe – to create rampant inflation. But it didn’t. Inflation has remained around the Bank of England’s target of two percent ever since QE was begun a decade ago. I guess the Bank of England’s Monetary Policy Committee (MPC) is a touch smarter than were Mugabe’s finance advisers – they can tell when enough is enough.
But then perhaps the reason that QE didn’t cause inflation is precisely because the money effectively printed by the Bank of England didn’t get spent. If it had ended up in the pockets of ordinary people who had gone out and splashed it on kitchens and televisions, surely it would have created inflationary pressures. It was the fact that it was sucked into assets, causing asset price inflation, that stopped it from feeding into consumer price inflation.
In reality, the Bank of England and other central banks are unlikely to go the full way and helicopter money direct into our gardens and back yards. A more likely scenario is that the money gets spent boosting public spending – financing Boris’ spending splurge. Already, the deficit reduction programme that George Osborne initiated and Philip Hammond continued has been thrown into reverse.
That raises the question of why governments don’t always do this – print the money they want to spend rather than extract it unwillingly from us in the form of taxation. How happier we would be if we were allowed to keep our full earnings. We would, of course, pay somehow, and that would be through inflation. But would that be so unfair? Trouble is, government-sanctioned inflation would not be a progressive form of taxation – it would hurt the poor the most, as the basic cost of living increased.
There is, needless to say, no such thing as a free lunch. Dabbling with printing money, whether you are going to use it to buy government bonds or whether you are going to helicopter it into our homes, is always going to be a highly hazardous operation which risks distorting the economy in all manner of ways, some of which will not be foreseen. Those of us who predicted dire consequences last time might just turn out to proven right second time around.