The promise of monetizing the debt is often too good to be true. That doesn’t mean it ought to be taboo, Greg Ip says.
With fiscal and monetary policy reaching their limits, the search for new solutions to the world’s low-growth, low inflation rut has turned to “helicopter money.”
The policy gets its name from an essay by Milton Friedman in 1969 that imagined newly printed money dropped from helicopters. While it evokes images of Weimar Germany and hyperinflation, it’s actually not that exotic or, for the U.S., unprecedented. It’s a logical option for any country struggling with deflation and slow growth, as Japan has and perhaps other countries some day may.
Peter Praet, the European Central Bank’s chief economist, recently noted, “All central banks can do it. The question is, if and when is it opportune.” Richard Clarida, a Columbia University economist, predicts: “We will see a variant of helicopter money (perhaps thinly disguised) in the next 10 years if not the next five.”
Mr. Friedman used the helicopter as a metaphor to argue that the government could always create inflation by printing enough money. As people spent the money, nominal gross domestic product would rise—either through the production of more goods and services, higher prices or both.
Haven’t central banks been doing that, through quantitative easing, known as QE? No. Helicopter money—which, in its more practical forms, is called monetary finance, or monetizing the debt—is used to purchase goods and services. With QE, the newly created money is used to buy government bonds. This pushes down bond yields, which should make consumers borrow and spend more—as interest rate cuts do in normal times. But that may not work, if people are so risk-averse they are willing to hold Treasury bills or cash with no return whatsoever rather than spend.
Helicopter money is also different from traditional fiscal stimulus. Then, the government sells bonds to the public and uses the proceeds to directly stimulate demand, for example by building highways, hiring teachers or cutting taxes. But eventually more government borrowing will push up interest rates, hurting private investment and raising solvency worries. Households, expecting their taxes to rise, may spend less (a phenomenon dubbed Ricardian equivalence).
Helicopter money merges QE and fiscal policy while, in theory, getting around limitations on both. The government issues bonds to the central bank, which pays for them with newly created money. The government uses that money to invest, hire, send people checks or cut taxes, virtually guaranteeing that total spending will go up. Because the Fed, not the public, is buying the bonds, private investment isn’t crowded out....MORE