Stop toying with helicopter money

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

Since the eruption of the pandemic, if health professionalsare on their toes to neutralize the spread of this deadly virus, host ofexperts in business, finance and economy are engaged in analysing the twindamage which the deadly infection has unleashed  on socio economicfront. These experts, which include former Reserve Bank of India governorsRaghuram Rajan and Urjit Patel, have put forth their suggestions to overcomethe economic losses the disease has caused and going to induce in itsaftermath. Global rating agencies and apex industry bodies  too areworking overtime to assess the extant of socio-economic damage caused by thepandemic and listing measures to compensate the losses.

   

Amid a series of sector-wise data projection showing severeeconomic losses and measures suggested to reboot the economy during the ongoingcrisis and even in the aftermath of the pandemic, there has been a unique talkof helicopter money – a measure to pump money into the dwindling economic scenariowhere lockdown has led to loss of income to individuals as well as to firms.Interestingly, some economists suggested that central banks should fund thefight 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 argumentgoes; nor would government debt need to increase. Recent advocates of printingmoney include Adair Turner, former chairman of the UK’s Financial ServicesAuthority, and Jordi Gali, the Spanish economist.

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

“To counter (economic crisis) this we need a strategiceconomic policy. RBI should implement quantitative easing policy. This iscalled Helicopter Money. This will facilitate the states and financialinstitutions to accrue funds. We can come out of the financial crisis. Release5 per cent of funds from the GDP through Quantitative Easing Policy,” hesaid.

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

Before deliberating upon these concepts, it wouldappropriate to mention a statement of Piyush Goyal, who as acting financeminister in the first spell of Modi-led NDA government expressed himselffavouring printing of currency as a way of deficit financing, citing theexample of the US. He stated this while addressing the foundation dayanniversary event of the state-run Security Printing and Minting Corporation ofIndia (SPMCIL) on February 10, 2019. So, the idea of printing currency to fundthe deficit has been prevailing much before the present health emergency hitthe country.

The concept of printing the currency to fund the budgetdeficit was basically an act of  toying with the idea of helicoptermoney – a reference to an idea made popular by the American economist MiltonFriedman in 1969. While peeping into the theoretical concept of helicoptermoney, we find it as an unorthodox monetary policy tool option that is used bycentral banks to stimulate economies. Here the basic principle is to increasebroader economic activity and pushing the inflation up by putting more money incirculation in the market.

As printing of money to finance deficit increases inflationand is believed to be an attempt to extract more output in an under performingeconomy, it is potentially loaded with huge risks. Historically speaking, wedon’t find a sterling history whenever the governments have printed money to financetheir deficits.

One of the primary risks associated with helicopter money isthat the policy may lead to a significant currency devaluation in theinternational foreign exchange markets. The currency devaluation would beprimarily attributed to the creation of more money.

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

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

These are the instances which show how easily things canspiral out of control when a government prints currency to finance itsexpenditures. As this helicopter money boosts inflation, increases interestrates and borrowing costs, it then becomes a dire need to print money everyyear to fund burgeoning deficit.

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

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

Precisely, helicopter money could create more problems thanit 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 andwill store their wealth in foreign currencies.

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

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

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