Charles Hugh Smith
July 13, 2016
In effect, helicopter money turns the entire economy into a Ghost City.
The possibility that Japan might launch helicopter money stimulus sent global stock markets soaring in a paroxysm of pleasurable anticipation. But exactly what is helicopter money and what connection does it have to stock valuations, if any?
Broadly speaking, helicopter money is government deficit spending that is directed to households rather than the financial sector. Deficit means the government doesn’t have extra cash to pay for the stimulus program–it borrows it by selling government bonds.
With interest rates near-zero or even negative, it doesn’t cost governments much to borrow huge sums from future taxpayers. All bonds are borrowed from future taxpayers, because somebody will have to pay back the principal, even if there are no interest payments due.
Typically, bonds that mature (i.e. the principal must be returned to the owner of the bond) are replaced with newly issued bonds. In other words, government debt never declines, as new debt is issued to replace bonds that come due AND to fund additional spending.
The nearest household analogy is a mortgage which you “pay off” by borrowing an even larger sum every few years. The debt just keeps getting larger as time goes on.
The assumption here is that there will be more of everything in the future: more taxpayers paying more taxes, more consumers consuming more, more workers being even more productive, more corporations earning even more profits, and so on: more, more, more, more.
More of everything means it will be easier to pay the debt we borrowed from future taxpayers. The economy will be larger, tax receipts will be higher and productivity will drive profits and consumption higher.
This assumption worked for a few hundred years, but now it doesn’t. In Japan (and many other nations are soon to tread the same path), population is declining and GDP, profits, productivity and tax receipts are all stagnating.
This raises the terrifying prospect that there won’t be more of everything in the future. If there is less of everything, sacrifices must be made to roll over the mountain of debt accumulated in the past, and it soon becomes impossible to do so.
Here’s the magic part of helicopter money: to avoid all the problems of ever-rising debt in a stagnating economy, the central bank creates money out of thin air and buys the government bonds with the newly created money.