Stop toying with helicopter money

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Even as coronavirus has erupted like a volcano leading to most dangerous health emergency of modern times, it has equally triggered an unprecendented deep rooted socio-economic crisis. This coronavirus induced economic crisis is viewed, if not above but equivalent to the Great Depression of 1930. The government has been trying to intervene in proactive mode to lend support to the suffering socio-economic sectors and their stakeholders, but the packages have been so far rolled out as relief measures and not as stimulus to the economy.

Since the eruption of the pandemic, if health professionals are on their toes to neutralize the spread of this deadly virus, host of experts in business, finance and economy are engaged in analysing the twin damage which the deadly infection has unleashed  on socio economic front. These experts, which include former Reserve Bank of India governors Raghuram Rajan and Urjit Patel, have put forth their suggestions to overcome the economic losses the disease has caused and going to induce in its aftermath. Global rating agencies and apex industry bodies  too are working overtime to assess the extant of socio-economic damage caused by the pandemic and listing measures to compensate the losses.

Amid a series of sector-wise data projection showing severe economic losses and measures suggested to reboot the economy during the ongoing crisis and even in the aftermath of the pandemic, there has been a unique talk of helicopter money – a measure to pump money into the dwindling economic scenario where lockdown has led to loss of income to individuals as well as to firms. Interestingly, some economists suggested that central banks should fund the fight against the coronavirus by printing money and giving it to governments. There would be no need to raise taxes either now or in the future, the argument goes; nor would government debt need to increase. Recent advocates of printing money include Adair Turner, former chairman of the UK’s Financial Services Authority, and Jordi Gali, the Spanish economist.

Back home, a few days back Telangana chief minister K Chandrashekhar Rao picked the thread of these global economist suggesting printing of currency and called for implementing a ‘Helicopter Money’ scheme.

“To counter (economic crisis) this we need a strategic economic policy. RBI should implement quantitative easing policy. This is called Helicopter Money. This will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis. Release 5 per cent of funds from the GDP through Quantitative Easing Policy,” he said.

There’s no harm in suggesting measures to fight the economic crisis confronting the country at this juncture. Listing ‘helicopter money’ in parallel to ‘Quantitive Easing Policy’ as one such alternative is debatable. Even as the idea dished out by the Telangana chief minister is borrowed from international opinion makers, it makes a sense to first understand what this concept of ‘helicopter money’ is all about.

Before deliberating upon these concepts, it would appropriate to mention a statement of Piyush Goyal, who as acting finance minister in the first spell of Modi-led NDA government expressed himself favouring printing of currency as a way of deficit financing, citing the example of the US. He stated this while addressing the foundation day anniversary event of the state-run Security Printing and Minting Corporation of India (SPMCIL) on February 10, 2019. So, the idea of printing currency to fund the deficit has been prevailing much before the present health emergency hit the country.

The concept of printing the currency to fund the budget deficit was basically an act of  toying with the idea of helicopter money – a reference to an idea made popular by the American economist Milton Friedman in 1969. While peeping into the theoretical concept of helicopter money, we find it as an unorthodox monetary policy tool option that is used by central banks to stimulate economies. Here the basic principle is to increase broader economic activity and pushing the inflation up by putting more money in circulation in the market.

As printing of money to finance deficit increases inflation and is believed to be an attempt to extract more output in an under performing economy, it is potentially loaded with huge risks. Historically speaking, we don’t find a sterling history whenever the governments have printed money to finance their deficits.

One of the primary risks associated with helicopter money is that the policy may lead to a significant currency devaluation in the international foreign exchange markets. The currency devaluation would be primarily attributed to the creation of more money.

In 1920s, Weimar Germany  was in grip of hyperinflation for three years. Beginning in August 1921, Germany began to buy foreign currency with Marks at any price, but that only sped up devaluing the Mark considerably. In 1923, the Mark had lost meaning with the exchange rate of one trillion Marks to one dollar. It was simply a  financial tornado for Germans.

Zimbabwe too was caught in this precarious situation in the first part of this century. The facts reveal that there was a time when a 100 trillion Zimbabwe dollar bill wasn’t enough to buy a bus ticket in the country’s capital. And this kind of hyperinflation scenario has gripped Venezuela right now.

These are the instances which show how easily things can spiral out of control when a government prints currency to finance its expenditures. As this helicopter money boosts inflation, increases interest rates and borrowing costs, it then becomes a dire need to print money every year to fund burgeoning deficit.

So, while looking at the experience of printing currency in other countries, it can easily be concluded that such a move doesn’t increase economic output in any way, it merely causes inflation. And this increase in inflation is not good for economic health of the country. Government may double the supply of money, but the production of goods remains almost constant. You have more money in the system, but prices of commodities shot up. Precisely, printing more currency makes goods more expensive, but won’t change the quantity of goods.

It’s a common practice for governments to borrow money through bonds or any other financial instrument. These bonds are considered as safe for investment and it keeps inflation under control. By printing money to fund their expenditures, the inflation will shoot up and this would reduce the value of bonds. Falling value of bonds will keep investors away from bonds. To attract investors in high inflation scenario, the government would be raising interest rates to attract investors. Once inflation gets out of hand, it would be very difficult for the government to borrow money through bonds.

Precisely, helicopter money could create more problems than it solves. It is loaded with huge tendency to trigger collapse of economy more, than to benefit the economy in crisis. People would lose faith on currency and will store their wealth in foreign currencies.

Meanwhile, printing money doesn’t always cause inflation. As experts point out that the money supply depends not just on the monetary base, but the velocity of circulation (transactions) also matters. For example, if there is a sharp fall in transactions then it may be necessary to print money to avoid deflation. Experts  point out that the Bank of England during the liquidity trap of 2008-2012, pursued quantitative easing (increasing the monetary base) but this only had a minimal impact on underlying inflation. This is because although banks saw an increase in their reserves, they were reluctant to increase bank lending.

As far as pandemic induced scenario in India is concerned, it’s better to nip the evil in the bud. Stop toying with the idea of helicopter money.

(The views are of the author & not that of the institution he works for)