Citigroup Chief Economist Calls for EU and China to Use Helicopter Money

US Fed officials are also entertaining the option of fiscal deficits without an obligation to repay
July 15, 2016 2:14 pm Last Updated: July 15, 2016 2:21 pm

Many say Ben Bernanke is once again responsible for stocks making new highs. According to Bloomberg, he went to Japan this week to promote the idea of helicopter money—the outright monetization of fiscal deficits by the central bank without any obligation to ever repay the money.

“Helicopter money is a coordinated monetary and fiscal stimulus. It is a fiscal stimulus funded permanently by the Central Bank,” said Willem Buiter, the chief economist of Citigroup. While Bernanke went to Japan to promote the idea, Buiter would like to see it happen in Europe and China, ideally in combination with debt restructuring.

“There are obvious win-win situations that we could have. Restructuring of debt if possible, haircuts if necessary, and then a well-targeted fiscal stimulus funded ultimately through the European Central Bank (ECB), people’s helicopter money.”

People call it helicopter money because that is a sort of cute example.
— Willem Buiter, Citigroup

Helicopter money is different from the concept of quantitative easing, where the government has to repay the debt purchased directly or indirectly by the central bank. Most proponents of this tool think that the funding would have to go through the banking system, however, and could not be funded by the central bank directly.

Legality

“Central banks are not legally allowed to hand out cash. But the Fed funded 75 percent of the tax cuts, revenue shortfalls, and public spending increases after 2009. We’ve done that already. Central banks and governments are effectively the same thing,” said Joseph Gagnon, former associate director at the U.S. Federal Reserve Board.

“I think it would be politically illegitimate, no matter how attractive it may seem. I don’t see any Central Bank could survive that politically,” said Buiter.

According to former chief British regulator Lord Adair Turner, an early proponent of helicopter money, the government would issue a zero coupon perpetual bond, sell it to the banks, which would then hand it over to the central bank. It would keep the bond on its balance sheet forever (hence perpetual) and receive zero interest on it (hence zero coupon). Any monetary instrument that doesn’t bear interest and never matures is actual money.

“When you make quantitative easing permanent it ceases to be a liquidity exercise and becomes a mechanism for allowing governments to run fiscal deficits which do not create a future debt servicing liability,” said Adair Turner, head of the British financial regulatory body from 2008 to 2013.

The balance sheet of the Federal Reserve has been stable for the last two years (St. Louis Fed.)
The balance sheet of the Federal Reserve has been stable for the last two years (St. Louis Fed.)

“People call it helicopter money because that is a sort of cute example. But the Central Bank itself provides a fiscal stimulus by sending checks to every man, woman, and child of the country,” said Buiter, although the government would take care of sending out the money in the form of transfer payments, infrastructure spending, and tax cuts.

Whether it’s funded by the government or the central bank by an expansion of the money supply, both are zero cost ways of funding the government. If interest rates are zero, it doesn’t matter.
— John Williams, San Francisco Fed

Buiter thinks Europe would benefit most from infrastructure investment, whereas China should spend the money on transfer payments to speed up its rebalancing from investment growth to consumption.

US Stance

“In a country like Germany where infrastructure investment is needed, the government announces and implements a large-scale investment program and indirectly sells the debt to fund this program to the central bank, which monetizes it,” said Buiter.  

In China, Buiter advises “fiscal stimulus targeted mainly at consumption, not at investment. Some capital expenditure like social housing, affordable housing, even some infrastructure. But organization supporting infrastructure, not high-speed trains in Tibet. It has to be funded by the central government, the only entity with deep pockets, and it has to be monetized by the People’s Bank of China.”

In the United States, the Fed hasn’t officially discussed using this method to spur inflation, although some Fed officials have mentioned the possibility as part of their personal remarks. San Francisco Fed president John Williams, for example, said you don’t need helicopter money if interest rates are close to zero anyway, which they are in Europe and Japan. 

“Whether it’s funded by the government or the central bank by an expansion of the money supply, both are zero cost ways of funding the government. If interest rates are zero, it doesn’t matter,” he says.

Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland said helicopter money could be an option.

“We’re always assessing tools that we could use,” Mester told the Australia’s ABC. “In the United States we’ve done quantitative easing and I think that’s proven to be useful. So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.” 

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