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The Nomad Economist
Premiered May 4, 2022
Why do we hear so much about Helicopter Money lately? Here is what you need to know about the theory that for decades has inspired the work of famous economists and which has now has become strongly topical again.
Many confuse the idea of helicopter money with that of quantitative easing (QE). QE is an unconventional monetary operation designed by the central bank to purchase government bonds held by banks in exchange for liquidity.
In essence, the central bank acts as a captive buyer of the outstanding bonds. The effect provoked by QE is to lower interest rates, making it less expensive to finance consumption and investments. However, this indirect QE stimulation mechanism did not work entirely as households and businesses were reluctant to borrow money despite negative interest rates.
The helicopter money option is primarily a fiscal intervention that introduces new net financial assets into the private sector, stimulating the real economy directly and immediately, without passing through the financial system.
For this reason, Helicopter money is also defined by the term People’s QE.
Is there a Hyperinflation risk? One of the main risks associated with money launched from helicopters is that it could lead to a significant devaluation of the currency and an exponential growth in inflation or even hyperinflation.
As more money is printed and the supply increases, the value of the domestic currency may, in fact, decrease significantly. Since 1920, 56 documented episodes of hyperinflation have occurred, some of which involved monetizing public debt in order to support government spending now out of control.
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The danger is that the decision-making process of governments will become increasingly dependent on helicopter money and that any remaining constraints against excess paper money in the system would be abolished.
The most famous cases of hyperinflation are those who have exploded in the Weimar Republic, Zimbabwe, and Venezuela. All of this historical evidence shows that human nature plays an important role in ensuring that helicopter money can truly be successful.
https://www.youtube.com/watch?v=jqI6-EDG9cM
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