In times of hardship, it can seem like economies need a care package consisting of much-needed funding. That’s precisely what helicopter money aims to do.
Helicopter money definition
Helicopter money, also known as a helicopter drop, was developed by economist Milton Friedman. It refers to a strategy for financial stimulus used in times of recession. The helicopter money theory is based on the idea that this form of stimulation impacts the economy as if an extra injection of cash had been dropped from a supply helicopter.
When is helicopter money used?
A helicopter drop is used during times of economic hardship, such as when interest rates hit zero or a recession strikes. Helicopter money aims to stimulate the economy, encouraging spending to help support businesses and bring some stability to the market.
How does helicopter money work?
There are several ways the helicopter money strategy can be used, including:
Printing new money and distributing it to the public
Introducing tax cuts
Helicopter money is a concept, but the actual initiatives derived from the concept can take different forms. When it comes to recent uses of helicopter money, 2020 was a remarkable year. COVID-19 was a huge blow to the global economy and the much buzzed-about “stimulus checks” could be considered a variant on helicopter money, due to the fact that they’re distributed by the state (as opposed to the bank). Helicopter money in 2020 has also been a consideration in Europe, with Switzerland launching a referendum on an initiative to pay out 7,500 francs to every Swiss citizen.
Is helicopter money bad?
The helicopter money theory is not inherently bad, but some economists argue against its efficacy because once these extra funds are distributed, it’s hard to drain them again. That means that even if helicopter money works as intended, over the long-term it may still trigger inflation. There are lots of pros and cons of helicopter money to consider.
Pros of helicopter money:
There is no borrowing needed, so no extra debt
Does not impact interest rates through borrowing
Boosts spending by increasing aggregate demand
Cons of helicopter money:
Can lead to over inflation
Can cause local currency to lose value, causing a knock-on effect on imports and production
Quantitative easing is a similar, more commonly used strategy for helping to stimulate economies.
What is the difference between helicopter money and quantitative easing?
A similar theory to helicopter money is quantitative easing, also known as QE. This is when the central bank of a country commits to buying financial assets like bonds from the government or banks. QE requires the central bank to create more money, either in physical or digital form, and therefore increase the balance sheet.
By buying these assets, the supply of money increases and the cost of money is reduced. This leads to lower interest rates, helping banks offer better terms so people are encouraged to borrow and spend. However, QE does not always guarantee this outcome and in the worst-case scenario, economies suffer from stagflation – that is, a situation wherein inflation has occurred but not the hoped-for economic growth.
QE is a method the U.S Federal Reserve has turned to in the wake of COVID-19, announcing a QE plan of more than $700 billion.
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