Can the monetarist helicopter fly?

We do not see the monetarist helicopter flying. In our view, the helicopter money concept has two caveats. Firstly, money would not be created against nothing meaning that the expected mechanical impact on prices is not guaranteed. Secondly, we suspect that, due to technical issues, such a strategy could not be deployed rapidly and cheaply.

The debate over helicopter money has not abated. On the contrary, think tanks have started to issue articulated reports to try to lift conceptual and technical skepticism. In this note, we modestly try to test their arguments in search of potential caveats. Our findings make us highly skeptical about not only the feasibility but above all the potential effectiveness of their supposed radical remedy to deflation.

Is the diagnosis right?

Helicopter money is a monetarist concept based on a quantitative theory of money. It was first evoked by Milton Friedman but never formalised thus remaining at the concept stage. We do not pretend to settle the debate between the proponents and the opponents of the monetarist view but it is important to bear in mind that alternative or contradicting views exist. The effectiveness of the helicopter money remedy largely relies on the accuracy of the monetarist diagnosis. However, there is no guarantee that it is right while, as stated by epistemology, it is impossible to prove that a theory is right, only that it is wrong.

Money for nothing?

As a quantitative theory, Monetarism claims that inflation is a pure monetary phenomenon. Unfortunately, as evidenced by the last decade, it has become particularly difficult to reflate prices. Devaluation is no longer available under a floating currency regime. It is always possible to generate imported inflation by depressing the exchange rate. However, other countries can easily neutralise this manoeuvre. Theoretically, another option consists of raising the wages of civil servants. Indeed, the state circulates its currency by spending. However, this is not politically feasible and Eurozone states, which have waived their monetary sovereignty, no longer enjoy such a margin for manoeuvre.

Helicopter money proponents claim that the ECB still has the possibility to manipulate the unit of measure by creating money against nothing. We believe that here lies the major caveat of their reasoning: it is not possible to create money against nothing.Money is created through a double entry game. Most of the time, this double entry takes the form of a simultaneous entry on the asset (loan, security) and liability (deposit) side. In the case of helicopter money, the increase in the ECB’s deposits (central bank reserves) would not correspond to any increase on the asset side, but instead to a reduction in equity which would rapidly turn negative. Does this mean that money would be created against nothing? Of course not. The equity reduction corresponds to an increase in someone’s debt, namely that of states.

Such a reality has been confirmed by Mario Draghi. During his last press conference, he firmly rejected the helicopter money option arguing that it was beyond the ECB’s mandate as it was about fiscal, not monetary, policy.

What is the difference with the traditional tax-cut-driven fiscal policy? Proponents see two differences:

- With helicopter money, fiscal policy would be better targeted as it would ensure that subsidies reach every individual. This is true, but it remains a strategy with poor investment returns. Would it not be better to invest in infrastructure or research?

- States’ new debt would have no maturity. Will it really make a difference for private agents in general and rating agencies in particular?

To sum-up, to us, helicopter money is equivalent to saying: “dear parents, please do not hesitate to borrow and spend, your children and grand-children will pay the bill for you”. We are not sure all parents will appreciate this.

Unanswered technical issues

As far as we know, the proponents have avoided the issue of the technicalities of helicopter money. Even if the adage states that “there are no issues, only solutions”, we wonder what the solutions to convey money from the ECB to individual bank accounts are and whether they can be implemented rapidly and cheaply.

We imagine that the radical approach would consist of providing individuals with deposit accounts at the ECB. Such an option has already been evoked by the proponents of crypto-currencies. So far, central banks have rejected this option notably because of the potential destabilisation for the banking system (in crisis times, no doubt that depositors would engage in a run on the banks and migrate all their cash on their ECB’s deposit account).

What are the alternative solutions? It is up to the helicopter money proponents to come with their proposals. But the latter will have to ensure that every entitled individual will get their subsidy and that nobody is able to play the system to get it several times. We are very skeptical such solutions can be easily, rapidly and cheaply deployed.

Our take

Not surprisingly, helicopter money proponents claim that such a strategy would be beneficial the banks in spite of reduced volumes. In our view, this prospect has depressed bank valuations. As we expect the helicopter money plan to remain in the central banker closet, we see this valuation pressure as undeserved.