Helicopter cash is economic tool of last resort

Rupert Searle | 15 May 2016

 

Dropping helicopter money as a last resort to tackle economic problems is with us – although finance minister and central banks won’t admit to the tactic.

The Bank of Japan has denied considering negative interest rates on loans to banks on the condition the banks pass the money on to personal and commercial borrowers.

In March, the European Central Bank set a -0.4% rate on the same terms within the Eurozone and has confirmed the arrangement will continue after April’s rate setting meeting.

The banks deny their strategy is helicopter money, but the reality is setting a negative interest rate is a disincentive for banks to keep cash on their balance sheets because they can make more money from lending than they can from hoarding.

The money is pumped into bank vaults by the ECB buying up bank bonds as fast as the banks can print them.

 

Does the policy work?

The effect is the same as the ECB printing off billions of euros, putting the cash into the back of vans and driving up to businesses offering them the chance to dip in for as much as they want.

The ECB wants to stimulate the Eurozone economy by making money available to spend.

Cutting interest rates also allows governments to splurge cash and cut taxes without borrowing.

US economist Milton Friedman dubbed the strategy ‘helicopter money’ in 1969.

The problem for Japan is the policy does not seem to work.

ECB president Mario Draghi is urging Eurozone government to align their policies with the bank.

Germany has criticised the strategy as ‘too loose’ and in a rare moment of standing up instead of bowing to pressure, Draghi pointed out that the ECB made neutral policies to benefit all Eurozone countries, not just to appease Germany.

He also explained that the Eurozone faces negative interest rates for years and inflation is likely to dip back into the red later this year.

 

Negative reaction to negative rates

Meanwhile, in the Asia Pacific, markets fell back and the Japanese Yen stacked up the largest loss for several weeks – down 1.11% against the US dollar.

The BoJ denied reports from market commentator Bloomberg that negative interest rates were under consideration for the bank’s meeting of ratesetters next week.

Although the Nikkei responded well to the speculation and closed higher, prices in London and New York fell during trading.

Some critics claim Japan is waging a currency war against other Asia Pacific economies by cutting rates as low as feasible to weaken the Yen.

A weaker Yen makes Japanese exports cheaper for other countries and adds to the country’s competitive edge against China, Vietnam, Indonesia and India.

The problem with helicopter cash is bankers and governments really have no other economic tools available to stimulate their economies, although the BoJ argues interest rates could fall further and the country’s quantitative easing programme could be expanded.

Tags: Rupert Searle eco helicopter cash quantitative easing

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