Helicopter Money

 

           Prolonged decline in demand or lack of demand in all sectors of the economy can be called recession. This reduction in demand should be significant. If there is a potential for growth and development in the economy, if there is a decrease in demand, the government should find a solution for it. To find a way out of the recession means to try to increase the demand for goods and services in the market! An increase in demand from the public will be possible only when the purchasing power of the public increases, i.e. people have more money to spend. Because of recession there is no production, no employment and all four factors of production land, labour, capital and entrepreneurship are not fully utilized. As a result, all these four components have limited income and hence their purchasing power is low. 

          Then the problem before the government is how to increase the demand of the people. Many ways are suggested in economics. Even though the government does not have enough revenue, the government should spend a lot on development and welfare works, it will put money in the hands of the people and increase their purchasing power and increase the demand! Another way is that if the central bank reduces the interest rate, loans become cheaper and people start spending more as there is no incentive to save! One way is to make more money available to the banks by the central bank through its monetary policy by purchasing government bonds in the open market (open market operations)!

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Another method that has been vigorously used in the last two and a half decades is Quantitative Easing. What if this demand does not increase by using these various means and growth does not overcome the recession? Nobel laureate economist Milton Friedman proposed a funny solution in 1969 - he called it 'helicopter money.' Meaning:

             In the words of Milton Friedman, “Suppose one day a helicopter came into the sky and opened its window and dropped $1,000.Amount dropped. People will naturally take this amount and spend it to meet their needs due to such a sudden gain of wealth. The lucky ones who receive this money from the sky will register a demand for goods in the market. There will be a sharp rise in demand but prices will rise as production and supply do not increase in such a short period of time. When demand and prices increase, producers will be tempted to increase production. For that they will work on the components of production. From it the rent of land, salary to laborers, interest to capital and profit to entrepreneurs, income of all will increase, their purchasing power will increase, demand will increase, production and employment will increase, recession will be removed and the economy will start growing. "

            In short, with the consent of the government, the central bank distributed free money to certain sections of the society, it can be called helicopter money. Just like Steroids are used to give temporary euphoria, vigor to the patient, helicopter money works to give the economy the first positive boost.

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          The central bank can provide such free money to the public in the following ways. 

         1. Allocation of cash amount randomly

         2. Depositing money into anyone's bank account.

        3. Giving taxpayers tax refunds or tax credits even when they are not due and having the central bank provide money for it (Australia did this in 2009)

        4. Providing free smart cards or credit cards with a certain amount of credit to the public and can be used to make purchases for a limited period of time otherwise they would be useless.

        5. Providing interest-free, non-repayable loans.

       6. Lending by the central bank to commercial banks at 'minus interest rate' whereby the central bank will pay interest on the loan amount to the borrowing commercial banks. This will make a lot of money available to the commercial banks without cost and then they will give that money to the public through cheap or free loans. Quantitative easing began to be widely used after the US financial crisis and the global recession that started in 2008. A program called 'QE for people' started in Europe should be called a type of helicopter money.

       In QE, the central bank supplies money to the banks by buying the average amount of bonds from the banks. That is, new currency comes into the market but it is given in exchange for (securities). But in the case of helicopter money, this is not the case with other assets. The amount is distributed directly (not through banks) and free (not in exchange) to citizens. QE is temporary. When the central bank feels that there is enough liquidity in the market, the central bank absorbs that liquidity by selling bonds again. But helicopter money, once felt, stays in the market forever. Hence, the money supply in the economy increases permanently.

Limitations:

           Distributing free money without paying anything to anyone creates the possibility of hyper inflation in the market. Confidence in the currency can be eroded. The value of the currency falls. In economics it is said that "There is no such thing as free lunch" helicopter money is a matter of getting free money so it should not be used. No matter how autonomous the central bank is, it cannot experiment with helicopter money without the support of fiscal policy. If such free money is distributed, it will adversely affect its profitability, if people and government get used to helicopter money, there is no possibility of not using it even in good economic times. For the experiment of helicopter money to be successful, the interest rate should be close to zero, otherwise the people who benefit from helicopter money will spend that money. Instead of saving and investing to earn interest, the objective of 'increasing demand' will not be achieved.

       Helicopter money is no longer just a bookish concept Since 2008, the countries of America, Europe, Japan, Australia have started taking steps for its actual use.

          In the most extreme scenario, where there is a huge and depressing decline in market demand, zero impact of all monetary policy measures, and a firm stance of the government not to use debt-based fiscal measures, helicopter money may be used as a no-brainer. Otherwise this solution may not be very tenable