Slowly but surely, Helicopter Money’s time is approaching and we better enjoy this experiment. The coronavirus pandemic, which is an absolute black-swan phenomenon, has forced governments and central banks to take measures that have a direct impact on the economy.
So, what could be more aggressive than distributing money to the public in order to keep the wheels of the economy turning? Is it the right time and what is the long term impact of this monetary policy?
First, What is Helicopter Money?
Helicopter money is a term coined by Milton Friedman and refers to a large sum of new money that is distributed to the public in order to stimulate the economy during a recession. In simple terms, when the economy is in a liquidity trap, Helicopter money is an unconventional monetary policy although, in the past two decades, it has been the standard policy of most developed countries worldwide.
How does Helicopter Money really work?
Well, obviously there is no ‘real’ helicopter that drops money from the sky but the term is being used as a metaphor for distributing funds to citizens. In reality, the funds will be automatically deposited in citizens’ bank accounts.
Nowadays, some economists propose that it’s time to use Helicopter money’ to stimulate the economy and more importantly, enable people to meet their basic needs.
This can be attributed to the alleged ‘success’ of central banks following the 2008 economic crisis that has strengthened the opinion of those who believe in government interventions, whether by monetary or fiscal policy. The Quantitative Easing (QE), which is a form of monetary policy in which a central bank purchases securities in order encourage lending and investment (or in other words, printing money), has been adopted by a number of central banks and is considered by many as the best solution for an economic recession.
Coronavirus and Helicopter Money – Can it work?
Fiscal interventions are a powerful tool but also extremely risky. Many countries have suffered from printing and distributing money to the public and thus, creating inflation and hyperinflation. Central banks have the ability to create money in the form of currency or provide credit to banks and businesses. But eventually, the United States is the only country in the world able to print U.S. dollars as its currency is used internationally and it would not significantly affect the value of the currency.
Essentially, governments have the power to print money, however, over-printing ends up cheapening the currency and may create even bigger problems that can end up with the worst scenario of the total valuelessness of the currency and the loss of the public confidence in the issuing government. This may be the doom scenario for the economic system as we know it and requires a restart of the whole system.
This does not come as a surprise. The risk of high inflation, high debts, and the loss of public confidence in the concept of money is out there and is highly possible. Since the coronavirus has entered our lives, many wonder about the concept of money and the economic cycle in general. Some also suggest a total shutdown of the global economy due to the coronavirus pandemic.
But measures to deal with the current crisis must be taken and so far, a limited number of countries have already made a first and second round of stimulus checks and this policy is expected to continue.
Ultimately, money is a man-made concept, which means we can do whatever we want. The free economy is a trial-and-error system where government, central banks, businesses, and individuals try different policies and methods to reach the ultimate system. The bizarre situation caused by the coronavirus pandemic can create a change in our global economic system. Perhaps the coronavirus pandemic can lead to full adoption of the Universal Basic Income policy to ensure that people are able to meet their most essential needs.