Fear The Smell Of (Monetary) Napalm In The Morning
Via ConvergEx’s Nick Colas,
Warm up the choppers and put some Wagner on the loudspeakers – “Helicopter money” is a hot economic topic.That’s where central banks print money and either hand it to the government for things like infrastructure investment or just send it out to consumers to spend. While that may sound like an extreme measure, advocates of this novel approach argue that it is a valid response to an extreme problem: slowing global growth and central banks with no “Standard” tools left in the shed.
But would it work? There are two real-world examples in the last 15 years that offer some clues: the 2001 and 2008 tax rebate checks mailed to millions of Americans for up to $600 (2001) and $1,200 (2008). Studies by the National Bureau of Economic Research done in the wake of both events show notable differences.
- In the first “Drop” (mid 2001), recipients reported spending most (53-73%) of their windfall.
- In the second (early 2008), the percentage dropped to one third and most recipients reported saving the cash or using it to reduce debt.
The key lesson here: if policymakers are considering “Helicopter money”, they need to have the choppers in the air before a crisis hits. After that, it is too late.
The world’s central bankers are apparently out of ideas for how to stimulate the global economy back to health. Low interest rates? Check. Zero interest rates? Check. Buying bonds to lower long term interest rates? Big check. Negative interest rates? Ditto. If monetary policy were a theme park, we could safely say we’ve been on every ride in the whole place.
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