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‘Helicopter’ policies start to gain ground

‘Helicopter’ policies start to gain ground

Central banks may have to hand out cash to consumers to spend in the high street to boost global growth and avoid deflation, economists have warned.

The move – dubbed ‘helicopter money’ – would be a more direct form of quantitative easing (QE), which critics say has had limited success.

The Organisation for Economic Co-operation and Development (OECD) warned “elusive global growth” required “urgent policy responses”, and said helicopter money was a possible solution, echoing comments floated by some economists since the financial crisis.

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Joshua McCallum, head of fixed income economics at UBS, said markets were speculating that central banks were running out of options, meaning a ‘helicopter money’ policy was now viable.

“If people believe central banks have no more power, then long-run inflation expectations fall and we could end up with price stagnation or even outright deflation,” he said.

“At the moment QE simply increases liquidity but cannot increase demand to borrow. So even though this form of helicopter money sounds unlikely now, so did negative rates and QE on the scale we’ve seen.

“People may be more willing to spend [helicopter money] even in a situation where they have a high level of debt.”

LGIM economist James Carrick said “helicopter money should create stronger real growth, higher inflation, and boost bond yields, potentially with an unchanged stock of debt.

“This should have a more powerful effect as you’re giving money directly to ordinary people, rather than [via the] indirect effects of lower bond yields and rising asset prices [via QE],” he said.

However, the policy does not come without a downside. Problems could well arise when, instead of spending the money, people put it into savings or pay off debt instead.

Hermes chief economist Neil Williams said the policy would spur inflation if people hoarded the capital, though that could be countered with effective rate policies.

In combination with low or negative interest rates – policies already adopted throughout developed markets – people should be discouraged to save and pay off debt with helicopter capital.

“The problem is we’re in what Keynes called a liquidity trap, where, worried about jobs and deflation, we hold on to the cash or pay off debt – no matter how hard it falls,” Mr Williams said.

The policy, if effective, would eventually raise tax revenues, inflation and growth. However, such an untested method could also spook markets, potentially causing a currency slump.

Both Mr McCallum and Mr Carrick said Japan would probably be the first to act if the policy were to be introduced. But both said the increased speculation over such a move was more about boosting market sentiment than signalling a growing chance of implementation.

Mr Carrick added: “The Abe government is desperate to try new tricks to end deflation, and in the 1930s, finance minister Takahashi used central bank money to fund public works. European politics are too messy to do this – treaties forbid deficit financing.”