The Fed Doesn't Own A Helicopter

by: Cullen Roche

Josh Brown has a very good post questioning an assertion by Ray Dalio regarding helicopter drops. Dalio said:

We can say that the range will extend from classic fiscal/monetary policy coordination - in which debt to finance government spending will be monetized - to sending people cash directly - i.e., helicopter money - and will likely fall somewhere between these two - i.e., sending people money tied to spending incentives," Dalio is referenced saying:

Helicopter money is a reference to an idea made popular by the American economist Milton Friedman in 1969 that dropping money out of helicopters for citizens to pick up was a sure way to restart the economy and effectively fight deflation.

First things first. The Fed does not control the quantity of deficit spending. So, even if it chooses to "monetize" this debt, it cannot increase the quantity that it monetizes. Dalio appears to have the causation backwards. Congress sets the size of the deficit (outside of automatic stabilizers) and the Fed can be said to "monetize" it after the fact.¹ If Congress chooses to run a balanced budget, the Fed has nothing to monetize. It can't just force Congress to spend more. And even if it "monetizes," then the Fed is just engaging in asset swaps such as QE thereby swapping very safe bonds for very safe cash. Calling this "monetization" is probably misleading.²

Second, the Fed has no legal authority to implement an actual helicopter drop. That is, the Fed can't just drop money from a helicopter. It is legally bounded by its ability to swap assets with the private sector. These assets are generally limited to government-guaranteed assets. So, not only is it impossible for the Fed to fire cash into people's wallets without taking something nearly equal out of their front pocket (the aforementioned asset swap), but I would argue that the Fed doesn't even own a helicopter in the first.

¹ - Technically, if the Fed purchased defaulting assets or assets above market value, you could say that this is a helicopter drop, but that's a whole different matter.

² - Ironically, QE has actually reduced private sector income by the quantity of the Fed's profit remittances to the US Treasury. Therefore, not only is QE not a helicopter drop, but it's more akin to a M230 Chain Gun being fired from the helicopter into the private sector.