Economy

What does Helicopter Money Mean?

Helicopter money, also known as helicopter drop, is an unconventional monetary policy tool used to inject cash into the economy through printing large sums of money and distributing it among the general public to stimulate the economic growth. Helicopter money also helps the economy recover from a liquidity trap. Metaphorically, helicopter money implies lifting the economy from a slump during periods of deflation.

Well known economist, Milton Freidman introduced the concept of helicopter money in his paper The Optimum Quantity of Money in 1960. In the paper he offered an absurd hypothesis that one day a helicopter flies over a community and drops thousand dollar bills which people collect hastily. The basic principle behind this is that the central banks want to increase inflation and output. Therefore, this assumption implied that the influx of money in the economy will be used to purchase goods and services. However, this would inevitably cause the price to rise, thereby bringing higher inflation. Falling costs can be profoundly harming to an economy.

Mr. Friedman’s persuasive investigation of the Great Depression concentrated on it only as a monetary phenomenon. He contended that national banks neglected to supply enough cash. When costs are falling, it makes customers and organizations hesitant to purchase anything as the object of interest might become less expensive tomorrow. It makes obligation more burdensome in light of the fact that you need to pay it back with cash that will be more significant in value the following day. These conditions can fuel a vicious spiral of economic shortcomings with falling costs which lead to intense monetary shortcomings.

The term helicopter money became popular when the Federal Reserve Chairman Ben Bernanke made a reference to it in a speech at the National Economists Club in 2002. In his speech, he explained how deflation results out of drastic fall in aggregate demand. Consumer spending becomes so low that the producers have to continuously cut down prices in order to find buyers. During this deflationary period, governments adopt anti-deflationary policies which include quantitative easing or a version of the helicopter money. He also mentioned that deflation is always reversible in a fiat money system.

In the modern sense, helicopter money can imply granting a universal tax rebate to all households, as financed by the central bank. This particular policy was adopted by Australia in 2009. The United States of America adopted this policy under the economic stimulus act of 2008, and the law provided tax rebates to those belonging to lower and middle-income brackets. It also included stimulating businesses through tax incentives. It must be noted that helicopter money is a temporary measure.

In late 2008, inflation rates in Zimbabwe went as high as 79.6 billion percent. It was a situation where prices would double every 24.7 hours. Zimbabwe was suffering from hyperinflation in 2008 when one U.S. dollar equated to 2.6 decillions (1033) Zimbabwean dollars. Their currency had become completely worthless. To reverse the plunge, in 2009 Zimbabwe replaced their dollar with several currencies that included the U.S. dollar. Knowing that money from other countries had value, people started doing more business and the GDP increased.

The traditional policies did not come to the rescue of the Zimbabwean government during the inflation as all their monetary policies remained ineffective due to the poor banking system. Since the government already struggled to pay the wage bill, it could not increase spending, or cut taxes. Hence in such a situation, the ideal choice was to adopt an unconventional monetary policy such as the helicopter drop. The then Governor of the Reserve Bank of Zimbabwe Dr. Gideon Gono implemented some projects like the Productive Sector Facility, Agriculture Sector Productivity Enhancement Facility, Farm Mechanisation Project, Parastatals and Local Authorities Reorientation Programme and Basic Commodities Supply Side Intervention through helicopter money.

With their exports worth more than their imports, Zimbabwe had less foreign currency and declining prices. This particular inflation did not instigate an economic boom but lead to the collapse of the economy as currency notes were being printed in spite of the falling output. The government stopped printing Zimbabwe dollars and implemented the practice of using the US dollar. This way the country was able to combat hyperinflation. Hyperinflation swapped into deflation very quick in Zimbabwe. This was a result of a continuous fall in prices. As the Zimbabweans started using US dollars, their supply became limited to the money in circulation of dollars locally.

In the month of November of 2017, the Indian government demonetised currency notes of ₹500 and ₹1000 denominations. This was supposed to curb unaccounted money. When countries like Japan and Europe were trying to increase the supply of money in their economy, the Indian government decided to freeze out a bulk of its citizens’ purchasing power. Thus, this policy worked in the opposite direction of the helicopter money policy.Thus, India had a ‘reverse helicopter money’ policy in 2017.

Helicopter money is a tool to be adopted during fiscal crises when conventional monetary policies are not efficient enough to help the economy to recover from a slump. Economies mainly consider it as an alternative to fight back deflation. Countries can implement different versions of helicopter money depending on the seriousness of the situation.

Picture Credits : www.ft.com



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