In the last few days Japan has announced a $45bn package of what is effectively “helicopter money”. In coming months we hope (pray!?) for similar in the UK. Here’s how it might work.
Emergency action in 2008/9 (QE and low interest rates) were vital to stop banking system collapsing. That emergency action is still with us, although “the emergency” is years behind us. This has pushed asset prices higher, and encouraged financial engineering, with the only significant result being the rich getting richer. Ordinary people and households did not get any benefit from QE.
Helicopter money is different because it enables Government to quickly and directly give a financial benefit to those in the real economy.
Hence the name – money can, in theory, be printed and simply be dropped out of helicopters.
The reality is that helicopter money can be much more subtle and targeted than the name suggests. For example, it can involve spending on specific projects, such as bridges, roads or hospitals; it might be a rolling benefit to a class of people, such as student loan deferment or forgiveness; or it can be one-off tax rebates, for everyone or certain types of people.
As well as creating a direct benefit to the real economy, the other essential feature of helicopter money is that it doesn’t increase government debt – this is the magic of helicopter money!
For example, the government can announce £1bn will be spent on new roads, railways and bridges. To pay for this they can issue a bond for £1bn. This is then bought by the Bank of England and written off (or held in perpetuity, the impact is the same).
Hey presto, £1bn of spending on useful projects, at no cost.
The economy is larger by £1bn, new employment is created, tax receipts go up, consumption is higher.
[In theory monetary policy is action by central banks (interest rates and QE) and fiscal policy is controlled by Government (taxes and spending). As you can tell from this example helicopter money requires co-operation of central bank and government.]
But even helicopter money is not a complete solution – spending is still too high, and the debt pile remains too big.
Over the last 40-odd years an edifice of services and entitlements has been created which is simply not sustainable. Partly due to the ageing population, partly due to the working population not being big enough to generate the taxes necessary to pay for all this.
So there also needs to be action to underpin long term growth and higher productivity (investing more into education and technology) and shorter term action to control spending (e.g. no universal State pension, no universally free access to GPs or A&E).
Taxpayers and voters (those with an anti-Establishment stance and otherwise) are much more likely to accept the latter if a helicopter money strategy is developed to cushion the blow.
The trigger for such radical action somewhere in the world was always going to be a shock to the system – it’s just that few of us expected the epicentre to be the UK. Whether Brexit is a sufficient shock for radical action remains to be seen – but it’s a good start!
And if the new UK government can begin to take such steps, with clear intent, it will likely encourage others, including near neighbours on the Continent – the noisy neighbour could be very cathartic.
Although some say helicopter money is revolutionary and untested, it only is to a point. Public works is the one part of the 1930s New Deal in the US that worked and helped pull it out of the Great Depression.
And arguably Margaret Thatcher introduced a form helicopter money when she allowed council houses to be purchased at huge discounts, ditto with the shares of privatised utilities – the result was a permanent increase in the wealth of those able to take advantage of these initiatives. (The argument against these being strictly helicopter money was the State lost assets, that is houses generating rent, and utilities generating profits – we’ll leave those niceties to the economists to debate).
The Bank of England MPC meets again on 3rd November, just before the Autumn Statement from the Chancellor. This would be a great opportunity for co-ordinated action to be announced – radical action and a confidence boost which has legs.
“Where there is no hope, it is incumbent on us to invent it” – Albert Camus (1913-1960)
If we are right about the direction of travel, have another look at the opportunities set out in The Next Big Thing – VALUE as set out in the latest edition of the TopFunds Guide. To request your copy get in touch.
For Part I on “What is helicopter money?” click here.