As central banks go on manoeuvres this week, there is still surprise at the height inflation has reached, (CPI at 6.8% pa in the US and 5.1% in the UK). And whereas in the Spring it was possible to dismiss high inflation as due to special factors, the widespread nature of price rises today suggests otherwise.
Monetarists of course can simply point to the explosive growth of broad money – US M2 hit a y/y growth rate of 27% last February and is up 40% since November 2019. Money never grew that fast before, even in the inflationary 1970s (see chart). But that would be to leave out the role of fiscal policy, also very expansionary in the US. Perhaps then, a better way to understand high inflation (and the robust economic rebound) is as a triumph for helicopter money.
What is helicopter money?
In its simplest form, helicopter money is money issued by the central bank and given directly to households or businesses. Milton Friedman, who coined the term in 1969, invoked the idea of printing dollar bills and dropping them out of a helicopter. In 2002, former Fed Chairman Ben Bernanke suggested it as the solution to Japan’s problems of persistently low growth and low inflation.
After the 2008-9 crisis, central banks engaged in quantitative easing on a massive scale and this went alongside large government deficits. Wasn’t this in effect helicopter money, many people asked? I don’t believe it was, because the amount of broad money in the economy did not rise particularly fast in those years. It hit 10% y/y at the peak in the US.
It is true that the monetary base rose dramatically, that is reserves at the central bank, but these were not spent. In effect the central banks through their QE programmes had switched the public sector’s long-term debt (owed by the government) into overnight debt (owed by the central bank). The result was to lower bond yields and drive up asset prices significantly. This doubtless helped stimulate the economy, but not enough to overcome all the headwinds from deleveraging and balance sheet re-building after the financial crisis.
This time, large scale QE and even larger-scale fiscal largesse have gone into people’s bank accounts so broad money aggregates are up significantly. And people are spending the money, especially on goods. Of course, some of the inflation we see is because this wave of spending is coming up against supply constraints and bottlenecks. But the overall effect is a lot more like helicopter money than last time.
A technical point
Another, more technical, point. For the combination of QE with fiscal stimulus to count as helicopter money, theory suggests that the QE has to be seen as permanent, that is, not likely to be withdrawn. Obviously notes dropped out of a helicopter can’t be taken back. But if the central bank is expected to run down its balance sheet at some point, selling bonds back into the market and reducing reserves, then it wouldn’t count as helicopter money.
So, we are talking about expectations. But it is easy to imagine that the scale of the largesse due to Covid this time has left people expecting that QE indeed will not be reversed. The Fed today will need to not just slow down bond purchases, but actually discuss reducing their portfolio in order to hint that QE may be reversed. If central bank balance sheets are not expected ever to be reduced much, then it really is helicopter money.
Proponents of helicopter money always argued that, implemented properly, it could boost growth and inflation. Looks like a success. Perhaps too much of one!