I would first like to state what I understand by a helicopter drop of money. I understand this to mean that the Fed is aiding the government in creating money, that is then dispersed into the economy. It is irrelevant to me how the government does this. It may be direct into people's bank accounts, invested in infrastructure or given in tax rebates. The point is that if the Fed were not buying up the bonds, the market interest rate that the government would be paying would be substantially higher. Any government can afford any interest rate, but if the interest rate increases substantially as the deficit increases, the investment status of the bonds comes into question. Eventually, a time comes when no one wants to invest in the bonds any more. This places a constraint on the government. Obviously, all of this would be done in the best interests of the U.S., but the outcome will not be the same without the monetization of the bonds.
I recently read this post by Cullen Roche. I find all of his articles very interesting, but disagree with the conclusions of this one. He makes the following points
1. The Fed does not have any influence on the fiscal deficit.
This is implicitly true. However, it seems to me to be irrelevant to the outcome. The U.S. has only run surpluses in the modern era from 1998-2001. Prior to that period, you go back to 1969 for the next surplus. So that is 4 years of surplus in the period from 1970-2015 or 45 years (link to data). To suggest that, in this era, there will not be a deficit seems to me to be semantics, rather than a point that is worth considering. Will all those who think that the U.S. is going to run a budget surplus in the next 5 years please stand up now! So I think it is reasonable to suggest that the Fed will not have a problem with this part of the helicopter engine.
2. The Fed has no legal remit to drop money from a helicopter.
Again, implicitly true. The Fed cannot print money. Here is a fantasy situation. Let's say that things go very pear shaped over the next 5 years and the deficit in the U.S. is:
- $1.0 trillion in 2017
- $1.5 trillion in 2018
- $1.6 trillion in 2019
And, the economy only grows 1.5% per year. The Fed has bought $4.1 trillion of bonds between 2017 and 2019 (all of the deficit) and has promised that it will not shrink the balance sheet until the economy can stand it. What would that be described as? According to Mr. Cullen that would not be either 'printing money' or a 'helicopter drop'. I wonder how many of you would agree? If you are the government, it is extremely useful to have someone keeping interest rates pinned to the floor, as you go about juicing the economy. Heaven knows if you didn't, you might have to do something difficult. Reduce regulation perhaps or overhaul the tax code, maybe even balance the budget without crashing the economy.
I have 2 other points to make:
1. We seem to only regard the Fed's actions as monetization if the Fed cancels the debt. This seems ridiculous to me. If the Fed keeps its balance sheet at its present level into perpetuity, has it not monetized the debt it has bought so far? As far as I am concerned, this is monetization. The Fed is never going to say that it has monetized the debt. It will never cancel the debt, it will just continue to hold it. It will always say that it is going to reduce its balance sheet when circumstances allow. At what point do we finally agree that this is not going to happen. Is it 2 years, 5, 10? How many years does it take for everyone to agree that the debt has been monetized.
2. The government is NEVER going to drop money from a helicopter. That is a ridiculous idea. This term has been used to describe deficit spending monetized by the Fed. It has a stigma attached to it that we need to recognize. The stigma is that if the Fed monetizes debt (as described above), the shackles are off the government. They can spend at will with no repercussions. This spending will be small at first and greater as time goes by. Japan is the living example of this progression.
It is my opinion that we need to get away from the semantics of the term 'helicopter money'. If the economy improves back to the growth levels in the 1980s, this will all become moot. However, this is unlikely. There is likely going to be deficit spending financed by the Fed in our future. In my opinion, it is in our present. What we call it seems irrelevant to me. We need to be honest about its effect. It will make it easier for the government to take the easy option. Japan has taught us this, if nothing else. I read daily that the U.S. is not Japan. That is assuredly true, but if we do not learn the lessons that Japan is teaching us, will we not follow them and become their image?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.