Why 'helicopter drops' of money into the economy wouldn't work

As Western central banks publicly show their willingness to print more money, analysts are increasingly asking whether it is time to consider more targeted monetary easing.

In effect, if the banks won’t lend should we simply create a new banking system to more directly release freshly minted money to businesses?

So far, on both sides of the Atlantic, quantitative easing (QE) has meant the buying of government or high-level corporate debt, and in the United States mortgage-backed securities.

Yet deflationists argue that what is really needed is targeted intervention, so-called ‘helicopter drops’ of money into specific market sectors. The evidence for such a move is supported by analysis of the waning effect of QE on the monetary base.

Data shows that while the last batch of quantitative easing came to an end in March this year, the monetary base has in fact grown steadily since then. Counter-intuitively, it shrunk while the Federal Reserve was still releasing funds.

So if more quantitative easing is likely to prove ineffective, would targeted releases of money into the economy work better?

Such an approach is advocated loudly by those such as former Bank of England rate-setter David Blanchflower who simply believe that the situation is so dire that anything that can be tried, should be.

Yet those taking a more consensual view – envisaging low but real growth in years to come – argue that the balance of the argument is finer.

Would 'helicopter drops' work?

The issue rests on whether the effect of more targeted releases of money – which bypassed the banks’ reluctance to lend – would find that it was welcomed by a nation ready to borrow, or would in fact discover that the problem is not the supply of credit, but the demand for credit.

The view of many eminent economists at the moment, such as Capital Economics’ Roger Bootle, is emphatically that there is a problem with demand in the economy – not supply. If this is the case, then surely more monetary intervention – which can only really stimulate demand by making the terms of supply more pleasing – can have just a limited effect.

Keith Wade, the chief economist at Schroders, is of this view. ‘I agree that QE hasn’t had a great deal of effect on the monetary aggregates. The problem is that the banking sector is not lending money, so there has been a slowing in the velocity at which money circulates and that means it is not flowing through to the real economy.

‘But do you then use more direct intervention? The question is to what extent people are not borrowing because they can’t, or not borrowing because they don’t think it’s a good time to borrow. I think it is probably a demand-side problem because the surveys suggest the banks are lending a bit more at the margins.