Donald Trump took a bit of flak earlier this month for talking fast and loose about the US government debt.
He did his whole alpha male, “I’ll show them whose boss” caricature. In essence, he said that when it comes to debt, he’d borrow whatever he needed to boost the economy, and if it all went wrong, he’d just “do a deal” with the country’s creditors.
After some less-than-positive reaction to the idea that the US could just “stiff” its creditors, Trump pointed out that he’d never actually default – because the US can just print dollars to repay its debt if absolutely necessary.
Ten years ago, before the financial crisis, that would have sounded like madness. We’d all have been screaming “Zimbabwe” at the idea that a mainstream politician – let alone a guy who has a good chance of shortly being the most powerful politician in the entire world – would even admit such a thing was possible.
Now? I firmly believe that it’s only a matter of time before what Trump’s suggesting becomes policy in at least one major developed economy…
Donald Trump, helicopters, and “proper” money printing
The pseudo-official term for what Trump means when he talks about printing money to pay the government’s debt, is “helicopter money”.
We’ve talked about helicopter money in the past here, but let’s just run through a simple definition.
Helicopter money is really just the point at which the government stops pretending that money printing is temporary.
Just now, for example, the Bank of England owns a pile of British government debt. It conjured money out of thin air to buy that debt. As a result, interest rates are lower than they otherwise would be (because the central bank contributed an extra £300bn-plus chunk of demand for government debt). This is the point of quantitative easing (QE).
The flipside is that – at some undefined point in the future – those gilts will need to be sold back into the market. So that injection of money is temporary (in the loosest sense of the word – I’m sure we’d all love to take out a “temporary” interest-free loan from an institution that we ultimately control).
Helicopter money comes about when you print money and no one has to pay it back, ever. So you credit everyone’s bank account with £1,000, for example. Whatever they decide to do with it, that money’s not coming back. Or you write off the government bonds that you own as a central bank – you just say that the government never has to repay the money.
The point is that these moves are not directly reversible (obviously the Bank of England can still raise interest rates or tighten monetary policy, but there’s no “overhang”). That printed money has permanently entered the system.
There is nothing to prevent helicopter money
It’s a policy that’s been discussed widely in academic and “wonkish” circles – particularly among people who argue that government debt doesn’t matter, and that we should be doing as much “stimulus” as possible.
(And as an aside, it’s been quite amusing watching commentators who would normally rather chew their own fingers off than type a pro-Trump sentence rush out to half-heartedly defend his neo-Keynesian conversion. I don’t like Trump, but it’s hard not to be mildly awed by his ability to troll practically everyone on the planet, left-wing, right-wing, or indifferent.)
However, now the helicopters are very firmly coming out of the hangars. We’re reading more and more about ideas from banning cash (which could certainly be an enabling device for helicopter money, although it’s not necessary) to “people’s QE” in mainstream papers.
It’s worth understanding that there is absolutely no economic or legislative barrier to doing this. A lot of the stuff you read about helicopter money gets itself tied in knots over the impact on the central bank’s balance sheet – Stephanie Flanders has a good piece in the Financial Times this week which discusses the practicalities of how this would work, but the reality is that none of it really matters – or rather, it’s all about presentation, rather than any genuine obstacles.
Deutsche Bank recently put out a piece of research entitled: “Helicopters 101: your guide to monetary financing”. The authors point out that: “Unlike any corporate, government or household, a central bank has no reason to be bound by its balance sheet or income statement. It can simply create money out of thin air (a liability) and buy an asset or give the liability (money) out for free. It can run perpetual losses… because it can fund these by printing more money.”
The sole obstacle is political. And that – I suspect – is why we’re hearing so much about it now. As Flanders puts it: “If another downturn threatens while policy rates are still close to zero… it is a reasonable assumption that at least one central bank abandons the pretence and monetary financing [another name for helicopter money] will complete its move from the unthinkable to the merely ‘unconventional’”.
What happens when central banks own everything?
So what happens when central banks start to print money and they don’t even pretend that there’s a limit to it?
This is a heck of a big question, and I’m not sure anyone has the answers. But it’s a pretty terrifying prospect.
One big risk is inflation, obviously. You pump a load of money into the system and you convince people that they’d better spend it or it’ll rapidly be worthless, then – depending on the quantities – you could quickly find yourself in big trouble.
But obviously, when QE was launched back in 2009, I was very worried about inflation then too. And that’s not how things turned out.
And Japan has experimented with radical monetary policy in the recent past (in the form of shopping vouchers) and still is. Yet we haven’t seen inflation take off there yet either.
That’s not to say it won’t. Maybe it hasn’t experimented hard enough. Maybe the problem is that radical monetary policy is binary: either it doesn’t do much, or it simply detonates confidence in the financial system and you get a deflation/hyperinflation outcome (Richard Koo has argued in the past that the only way to ignite inflation against the backdrop of a balance sheet recession – the sort we’ve been going through – is to make everyone believe that the central bank has gone mad, which is not really the way to maintain confidence in a financial system).
So what if helicopters don’t work? What if central banks keep buying assets at the behest of governments and all we get is even more of the same?
It’s becoming more and more pertinent. The Bank of Japan is already a significant shareholder in some of Japan’s biggest companies. It buys in using exchange-traded funds – which means it doesn’t favour specific companies and doesn’t sit on the board, as it were. But there’s only a limited amount of equity in the world, and an unlimited amount of paper currency.
What happens when they own everything?
I was looking back through a transcript of my colleague Merryn’s interview with Bernard Connolly the other day. Connolly is highly critical of the European Union, and the main topic of conversation was, of course, Brexit.
But he’s also a respected market strategist and economist. And when he and Merryn were talking about potential outcomes from helicopter money and its variants (which Connolly seems to think is pretty much inevitable), one of the many unpalatable outcomes he brought up was this: “You end up ultimately with a complete socialisation of economic activity”.
You have to wonder if one day we’ll all be looking back and thinking that a mass liquidation in 2008 would have been the better option than whatever comes out of all this.