Thursday, October 18, 2012

A Helicopter Drop For England?

Lord Turner is one of two leading contenders to succeed Sir Mervyn King, he has made comments in the past that might indicate what "still more innovative and unconventional" monetary policies might look like. The outgoing Financial Services Authority chief doesn't spell it out, but in the past he has talked privately about the possibility of pure money financing of the deficit, when a person's "private" comments have been mentioned publicly often enough, the word private rather loses its meaning. The most well known example of this is the so-called "helicopter drop".

For example, the government could simply send every family in the country a onetime "Christmas Bonus" of  a thousand pounds or roughly sixteen hundred dollars, directly financed by money created by the Bank of England. It is fair to say that Lord Turner has never publicly proposed this kind of money drop, or suggested that it should happen right away. Still  the fact that a man of Lord Turner's position and experience is even hinting at this kind of solution to the UK's problems might be thought to indicate how serious he thinks problems in England have become. Of course, it also indicates that Lord Turner would not be a cautious or placid Bank of England governor.

The easiest way to think about a "helicopter drop" is as a lump sum temporary tax cut, or a one-off reverse tax. This would be  financed by new government bonds which are purchased by the Bank of England on the secondary market with all interest and redemption payments etc transferred back to the Treasury. This is similar to quantitative easing, to the extent that it is one part of the government lending to and acquiring claims against another. It is also similar in that it is reversible. The government could have a one-off tax increase, two years later, to get back the money that has been paid out, just as the Bank can now sell back the gilts it has bought under QE.

The only real difference between QE and even more "unconventional" money financing is that, with QE, the terms on which the money is created "are flexible and sensitive to inflationary pressures", whereas in the case of a helicopter drop, the terms are more open, both can cause distortions within a market. As long as Bank rate is near zero and the Bank of England buys new gilts to replace the ones that mature, quantitative easing looks an awful lot like a "helicopter drop". But providing it has the political will, as soon as the Bank starts raising interest rates and selling back those government bonds, the similarity with Zimbabwe starts to disappear.

Is this the path to economic prosperity? I think not, some may argue that it gives us more time to make tough structural reforms, others argue it allows us to postpone them. But to be effective it must be noted that even helicopter money needs to be directed. Its no good showering the country with cash to buy cheap imports. . The only answer will be time, try this, try that. Maybe even sit it out, or have a really big war, which is very unappealing. But is not given the credit it deserves as opposed to Keynsian " new deal ". US recovery & growth had more to do with WW II than the "new deal".   

Then again we should remember that the velocity of money, the speed that it moves throughout  the system is also important and should not be underestimated. At some point one might begin to speculate that those in power might try to hit a "reset" and start over or try to introduce a new "world-currency" as a replacement to all those that are failing. As in the case of  previous stimulus acts, tax cuts, or other one-off acts to get the economy moving it all depends on details. Still a system based on debt and mass consumption heavily reinforced with promises of future entitlements may not be sustainable. In the end where the money is placed, what it is used for, and where it flows does matter.

 Footnote added February 2014; I recently wrote an article that expands on calls for a new world currency, the link is below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

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