In my previous post I argued that introducing helicopter money does not imply that the inflation target must change. Another misguided criticism of helicopter money is that it is somehow more dangerous than other forms of monetary policy. The reality is very different – all forms of macroeconomic stimulus (fiscal or monetary) are equally “dangerous” in the sense that irresponsible implementation can lead to macroeconomic chaos.
Fiscal Deficits Are Dangerous
Whether they are monetised or not, excessive fiscal deficits are inflationary. The best example is the historical experience of Turkey where inflation remained out of control from the 1980s till 2001 despite there being no monetisation of deficits by the central bank. Innovations such as repos enabled the private sector to monetise government deficits as effectively as the central bank would have (For details, see section titled ‘Bond-financed or Money-financed deficits’ in my post ‘Monetary and Fiscal Economics for a Near-Credit Economy’).
Negative Real Rates Are Dangerous
During most significant hyperinflations throughout history, the catastrophic phase where money loses all value has been triggered by the central bank’s enforcement of highly negative real interest rates which encourages the rich and the well-connected to borrow at negative real rates and invest in real assets. The most famous example was the Weimar hyperinflation in Germany in the 1920s during which the central bank allowed banks and industrialists to borrow from it at as low an interest rate of 5% when inflation was well above 100%. The same phenomenon repeated itself during the hyperinflation in Zimbabwe during the last decade (For details on both, see my post ‘Hyperinflation, Deficits and Real Interest Rates’).
This also highlights the danger in simply enforcing a higher inflation target without taking the level of real interest rates into account. For example, if the Bank of England decided to target an inflation rate of 6% with the bank rates remaining at 0.50%, the risk of an inflationary spiral will increase dramatically as more and more private actors are tempted to borrow at a negative real rate and invest in real assets. Large negative real rates rarely incentivise those with access to cheap borrowing to invest in businesses. After all, why bother with building a business when borrowing and buying a house can make you rich? Moreover, just as was the case during the Weimar hyperinflation, it is only the rich and the well-connected crony capitalists and banks who benefit during such an episode. If the “danger” from macroeconomic policy is defined as the possibility of a rapid and spiralling loss of value in money, then negative real rates are far more dangerous than helicopter money.
Helicopter Money + Rate Hike Is Not Dangerous
If helicopter drops are implemented without any concern for how negative real interest rates may get, they are dangerous. But, as I mentioned in my previous post, “helicopter drops can be implemented without any change in inflation so long as interest rates are hiked to counteract the inflationary impact of helicopter money”.
“Permanent” helicopter money is no more dangerous than “temporary” QE. In a world where the central bank pays interest on reserves, money itself is just a form of government debt. Even prior to the crisis, the ability of the private sector to repo government bonds for cash meant that government bonds function as money-equivalents. Once the deficit has been incurred, the nature of financing (bond or money) is irrelevant. All that matters are the level of fiscal deficits and the level of real interest rates.
As always, the conventional wisdom simply mirrors the interests of the 1%. It is considered “normal” to dole out favours to well-connected crony capitalists. It is considered “safe” for the central bank to drive down real rates, buy financial assets and prop up asset prices. But it is considered “dangerous” to direct stimulus to the asset-poor masses.