FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 22 July 2016

Helicopters Are Coming

Written by

In 1969, in a paper entitled "The Optimum Quantity of Money", Milton Friedman wrote a parable about dropping money from helicopters for people to pick up off the ground. The idea is that to increase economic activity and create inflation in an economy running at less than capacity, an effective tool is direct transfer payments to the people.

Friedman wrote:

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated."

This has widely been interpreted as suggesting actions of two types:

  1. Fiscal stimulus by increasing deficit spending by collecting fewer tax dollars; and

  2. Monetary stimulus via central bank purchase of assets from banks paid for by increase in excess reserves.

In the first case the sovereign debt is increased (now or in future obligations) by the amount of the stimulus. Two specific examples from recent history are the G.W. Bush tax rebates of 2001 and 2008; and the Obama reduction of employee FICA payments 2009-2012.

In the second case examples are the QE (quantitative easing) programs implemented by Fed Chair Ben Bernanke 2008-2013, and since copied by other banks, most notably the Bank of England and the European Central Bank. (Note: Bernanke was not the first central banker to use QE - the Bank of Japan started QE programs in 2001.)

It's Not 'Free Money'

Friedman argued that, since the cost of producing fiat money was negligible, money could be produced at any rate below that which would produce undesired levels of inflation. This can be paraphrased as an argument that money should be free to the extent that it was not created in excess of economic need.

But the two types of money 'creation' described in the section above was not produced at negligible cost:

  1. The tax cuts or rebates created current deficits or deficits against future obligations. It may be argued that federal debts need never be paid, but, as things are run today, they do create an obligation to pay interest. So that money is not free.

  2. The QE money credited against bank excess reserves simply replaced the value of the assets added to the Fed balance sheet. So there was little expense by an accounting standard, but there was, in fact, no money created - simply asset transfers.

QE for Main Street

There have many speculations about the desirability of somehow having central banks provide money directly to the citizen or businesses. Most central banks are organized in a way that prohibits such an action DIRECTLY.

But, though not much discussed, the European Central Bank (ECB) has opened a program which is a move in that direction, although not direct in a single step.

The program is called the TLTRO (targeted longer-term refinancing operations) program. This has a relationship to QE in that the ECB provides credit to banks when they extend loans to the real economy, but is different than QE because these credits are only for new loans, and not for the sale of existing credit assets to the central bank.

These TLTRO credits can be specified for specific target areas in the economy, such as mortgages, auto loans or general consumer credit.

The banks find using these credits to be attractive because the ECB can offer the money at a discounted rate, making the profit margins for the banks greater than for other similar loans.

But This Is Not Helicopter Money

No, this is not helicopter money as described. But Eric Lonergan pointed out a couple of days ago that it is only a nudge away from helicopter money. The following step can get it closer:

The ECB can provide credit to the banks at a sufficiently negative rate that the banks could extend free credit. Say, for example, that the credit from the ECB was at a rate of -5%. Then a loan on which the borrower pays no interest is making 5% return for the bank, paid for by the ECB.

But this is Still Not Helicopter Money

If you say this is still not helicopter money, you are right - because it needs to be repaid. So it is merely money free to use for the term of the loan and then is taken out of the economy.

But one more step gets us there.

If the loans are perpetual then we have completed the helicopter drop.

True Helicopter Money is Being Discussed

You think that is absurd? Maybe not. Ben Bernanke was just in Tokyo discussing how perpetual bonds might become part of the arsenal of the Bank of Japan. This discussion is, of course, considered as means for Japan to spend more than it collects in taxes without increasing "marketable" debt. The BoJ funds deficits by issuing perpetual bonds at zero interest and retains ownership of the "securities".

Will Helicopter Money Come to the Eurozone?

How soon will the final step to helicopter money for the real economy arrive in Europe? Cannot tell at this point, but the machinery has been set up. And Europe certainly is becoming acclimated to negative interest rates. Central bankers are talking - and eventually they often act on their words. One big hurdle has been passed for sure - negative interest rates are entrenched. All that is needed is perpetual bonds.


It is not inconceivable that a successful program could involve all of the mechanisms we have covered. Some perpetual bonds, more in no interest loans which are redeemed when the economy is stronger or inflation needs some brakes and some traditional government securities which are needed for financial system liquidity.

Whatever parts of these possibilities are realized, there is no question the future will be quite interesting. As if it were not already more interesting than we really need for our own comfort.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Opinion


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
A Short Note on a Connection Between Marginalist Economics and Folk Medicine
Run A High Pressure Economy? Janet Yellen Does Not Understand the Problem
News Blog
22 October 2016 Initial Unemployment Claims: Rolling Averages Marginally Worsen
Durable Goods New Orders Marginally Declined in September 2016
Infographic Of The Day: 41 Interesting Facts About Tesla Motors
Early Headlines: Asia Stocks Down, Oil Lower, Great Lakes Wind Power, Chinese Moving Mfg To US, Tesla Reports Profit, Dems Forecast To Take Senate, China's Debt And More
How Miller Stacks Up Against His Draft Class
Inside The Machine: How Two Nobel Winners Taught Us How Companies Tick
Healthcare's Dirty Little Secret: Results From Many Clinical Trials Are Unreliable
The Cleveland Indian's Unique Use Of Andrew Miller
What We Read Today 26 October 2016
Why Do So Many Price Tags End In .99
September 2016 New Home Sales Improve.
Higher GDP Growth In The Long Run Requires Higher Productivity Growth
Quantum Encryption Is Secure Because Information Encoded In A Quantum Particle Is Destroyed As Soon As It Is Measured
Investing Blog
Thirsty For Income? How To Thrive In This Yield Desert
Apple's First Annual Sales Decline In 15 Years
Opinion Blog
A Hard Brexit And Reduced Migration Won't Benefit UK Workers
What Triggers Collapse?
Precious Metals Blog
Inflation Surging As Platinum Signals Stock Market Decline
Live Markets
27Oct2016 Pre-Market Commentary: Wall Street Pointing To A Higher Opening, Unemployment Benefits Fell, SP 500 Futures Up 0.4 Percent
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved