Helicopter money – A possible reality By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

April 12, 2016 | Posted by bobbysrinivasan << back to blog

The world economy has entered into a serious deflationary trend. Many currencies of countries are getting devalued against the dollar. Commodity prices have seen new lows not seen in two decades. Global economic growth is getting much slower with some countries are getting prepared for a hard landing including China. The Central Banks of the world are scratching their heads as to how to revive the sagging global economy. They do complain that there is only so much monetary policy can do to revive the animal spirits in the absence of a fiscal boost from governments.

Milton Friedman, a US Nobel prize economist in his 1969 essay titled “the optimum quantity of money” spoke about a scheme called helicopter money which involved dropping money on its citizens. Following his recommendation, in our country the money could be directly credited through the Aadhar card system. Peter Praet of the European Central Bank said and I quote “it’s all Central banks can do it”. His colleague Jens Weidmann warned that such a move “would rip huge holes in the central bank balance sheets”. Friedman’s concern was in a perfectly balanced economy; how much money should be in circulation to guarantee a community’s ability to buy goods and services? Of course he includes an important proviso that money dropping should be a one time but never repeated event.

The US Central Bank adapted a different scheme but with the same intention, they introduced Quantitative easing which is again putting money in people hands. In 2009, the Fed bought $ 1.75 trillion worth of bonds followed by 1600 billion in 2010. They shifted to an open ended program of at $ 85 billion per month which was slimmed down from December 2013 which finally ended in October 2014. The recent experiments in the Eurozone with quantitative easing have not produced the desired result. Currently the interest rates there have dropped to the negative territory.

In a separate essay on the role of monetary Friedman compared what was happening in the 1970s and 1920s which chimes where we are now I quote him,

“I fear that, now as then, the pendulum may well have swing too far, that now as then, we are then assigning to monetary policy a larger role than it can perform in danger of asking it to accomplish tasks that it cannot achieve and as a result, in danger of preventing it for making the contributions that it is capable of making”.

Friedman describes money as an extraordinary machine. He also points out that it can wreak havoc. Currently zero or negative interest rates are failing to improve consumer prices index while the Fed’s attempt to normalize is not succeeding. Why the money machine is failing to deliver? So what needs to be done to revive the economy? Why not try helicopter money? A major deflation is on its way. Hopefully the central bankers will get together and take appropriate actions. Failure in their effort will lead the global economy to a disaster which no body wants it.

<< back to blog

About Us

TERM ZERO

Media

Rankings

Accreditations

NIRF

Campus

Blog

Annual Events

Full Time Programs

PGPM

PGDM

EXECUTIVE EDUCATION

Corporate Programs

PGXPM

PGPM Flex

MBA in Business Analytics

Family Enterprises Management

Ranked 6 ^th

Faculty

Research

Centers of Excellence

Conferences

Campus Recruitment

Internships

Placement Reports

Leadership Series

Talent Listings

Ranked 6 th

Ranked 6 ^th