What is meant by Helicopter Money – Pros and Cons

The term “Helicopter money” may be new for you as its making headlines nowadays. By helicopter money the first scene that may come in your mind is “a helicopter scattering banknotes from the sky”, which may also be referred to as “helicopter drop”. Basically, it means printing money and distributing directly to the public so that they can fulfill their basic needs. This concept is used to bring a struggling economy out of recession. Are you looking for what is meant by helicopter money? Who coined the phrase helicopter money? What are the pros and cons of helicopter money? Here in this article, we have the answer to all these questions.

Helicopter money is in news due to the global recession caused by coronavirus. With a large number of job cuts, decreased purchasing power due to which demand fallen in every sector and economies are stuck in recession. The Government uses many fiscal and monetary tools to bring out economies from recession. Helicopter money is also one of these monetary tools using which the economy is prevented from getting caught in the recession.

What is meant by Helicopter Money?

Helicopter money is a term used for a large amount of new money that is printed and distributed among the public to stimulate the staggering economy. Helicopter money is an uncommon monetary policy tool, suggested as an alternative to quantitative easing. Under this policy, Central Bank directly increases the money supply and distributes the new cash to the population to boost the demand and inflation.  It is used by the central bank of the country to spur economic growth.

The term is symbolic for “helicopter scattering money from sky”, because the public did not expect this unexpected money and has come directly to their account as if it had fallen from the sky.

Who coined the phrase Helicopter Money?

The phrase “helicopter money” was coined by Milton Friedman, an American economist in 1969, when he wrote a parable of dropping money from a helicopter to illustrate the effects of monetary expansion. Later, Federal Reserve Chairman Ben Bernanke referenced it in his well known 2002 speech on what extreme measures Japan could take to defeat inflation. Helicopter money let central bank put money directly in the hands of spenders whether households, businesses or the government – rather than relying on indirect injections or incentives, such as lower interest rates.

Helicopter Money vs. Quantitative Easing

Helicopter Money is an uncommon monetary policy tool that the central bank uses to boost the economic growth. “Helicopter money” was introduced by an American economist Milton Friedman in 1969, later popularized by Fed Reserve Chairman Ben Bernanke in 2002.

This tool should theoretically be used in case of zero or low-interest rate environment when an economy is struggling for growth. Basically, this concept means non-repayable money supply from the central bank to the public, via government. It seeks to help people to spend more, increasing the demand and inflation which in turn helps to boost the sagging economy.

Whereas under Quantitative easing, central bank increase the money supply and lower interest rates by purchasing government bonds or other longer-term securities from the open market to spur economic growth. Later, Government has to buy back these bonds and securities, returning the money to the central bank. Unlike helicopter money, the central bank uses quantitative easing to increase the money supply by purchasing assets to encourage lending and investment. Quantitative easing does not have a direct impact on the public while helicopter money is made directly available to the public to increase spending.

Pros and Cons 

Following are the pros and cons of helicopter money.

Pros

• The primary advantage of helicopter money is that the money created does not lead to government debt and interest rates remain unaltered.
• Helicopter money helps the population to increase spending and spur economic growth more effectively than QE because it leads to an increase in aggregate demand for goods and services immediately.
• When people start spending money they may spend more from their pocket too. It will fuel economic growth.
• While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.

Cons

• As the helicopter money is not linked to any borrowed asset (loan) therefore it may inhibit the central bank to use interest rates as a tool for conducting conventional monetary policy.
• It may make those banks unprofitable for some in future.
• Helicopter money is not a feasible solution to revive the economy.
• It may also lead to over-inflation and erode central bank’s balance sheet.
• The money is printed and supplied on large scale, so the value of currency also decreases significantly. Therefore, It may pose to the risk of currency devaluation in foreign exchange market.

Why Helicopter money making headlines?

With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao today said helicopter money can help states comes out of this situation. He asked for the release of 5% funds from GDP by way of quantitative easing (QE).QE, a policy followed all over the world, is the only way to deal with the situation, Rao said. “To counter (economic crisis) this we need a strategic economic policy. RBI should implement quantitative easing policy. This is called Helicopter Money. This will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis. Release 5 percent of funds from the GDP through Quantitative Easing Policy,” he suggested.

Conclusion

So it was all about the helicopter showering bank notes over your head.. hehe. We hope, you are enlightened with the new term “helicopter money”. However, this is not widely used because there are various monetary tools available with central bank. In past, helicopter money has given very poor results. It is very risky to use this tool and there are some technical complications too.

In an effort to bring the economy out of depression, Reserve Bank of Zimbabwe increased money supply in 2015-16. Zimbabwe’s helicopter drop proved disastrous. So, Central Banks should use this method as a catalyst to bring economy out of negative inflation and declining demand.