Image: Man Vyi Image: Man Vyi

How about this for an idea, you lend me £1,000, and I’ll pay you back £900 ten years from now? You may not find that proposal so attractive. Yet interest rates are negative in Demark, Sweden, Switzerland, Hungary, Japan and the euro area. If you were to buy German ten-year government bonds, known as bunds, you would receive a negative yield. Even if you were to buy out 30-year bunds, you would receive a yield of just 0.33%, meaning that if you fork out 100 euros for a 30-year bund today, by the time the year 2046 arrives you will have received just 10 euros in interest, in total.

If instead, you buy a 30-year Japanese government bond, the interest is even lower, just 0.25%. The equivalent UK bond yield is a bit more, 1.55%, and US ten years are yielding 2.18%.

The twitter-sphere has woken up to it. Take this as an example:


In fact, it turns out that roughly one-third of all government debt that is currently being issued is at negative interest rates.

This, in turn, is hitting banks who are making it harder than ever to turn in a profit at current interest rates. As NatWest found out, customers don’t react well if they are receiving negative interest rates on savings.

Here is the dilemma. The objective of negative interest rates is to persuade consumers to save less, spend more, and get both consumers and businesses to borrow more. This will theoretically boost investment and demand across the economy.

But to lend more, banks have to be satisfied that they can make sufficient profits from doing so, and in any case, they need a buffer of capital. Negative interest rates are making it less profitable to lend, and banks need profits to boost capital.

Negative interest rates also seem to be telling us that across the global economy demand is too low, savings are too high, and there is lots of spare capacity. There is a simple mathematical truism covering economics. For the global economy, income equals expenditure equals output. So if people start saving more, without a rise in investment or borrowing, then expenditure must be less than income, output will fall, and thus income will fall.

Something has to be done to get spending up.

And this brings us to an interesting debate about fiscal stimulus versus helicopter money.

This in an ongoing saga. In a nutshell, helicopter money is so named after a famous statement from Milton Friedman, the godfather of monetary economics. Back in 1969, Friedman considered a scenario in which a community was stuck in economic depression and no matter how much interest rates were cut, it stayed like that. He said: “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

And in 2002, Ben Bernanke, who is now the former chair of the Fed, but back then was still yet to take on that role said: “A broad-based tax cut, for example, accommodated by a programme of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead rebalanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.”

So is helicopter money a good idea?

And here is an update for you on the debate:

In a blog post, Duncan Weldon, head of research at the Resolution Group argued that there was no need for helicopter money, although he is in favour of governments taking advantage of ultra-low interest rates to borrow more and fund a massive fiscal stimulus. He wrote: “Bank [of England] can’t carry the burden alone without ending up with either helicopter money or what looks to be self-defeating negative rates . . .

. . . “we don’t know the long term consequences of extreme unconventional monetary policy. We do know it is creating unusual side effects — like trillions of dollars of negatively yielding bonds or an impact on the emerging economies that may now be spilling back over onto global growth. The Bank for International Settlements has been warning of these side effects for several years. It is an institution with a reputation that goes in cycles. For years at a time it is regarded as a naysayer or a quasi-Austrian voice calling for less easing, then a crisis hits and years later policymakers start to say ‘maybe the BIS had a point after all’. You don’t have to be a full Hayekian (Hayek was an economist with extreme pro-market views) to worry that extraordinary monetary policy may be stacking up new problems and asset bubbles for the future.”

In response to that, Eric Lonergan, a macro hedge fund manager, economist, and writer, took to his blog to argue that the big problem with fiscal stimulus is that it tends to involve spending money infrastructure and this can take be delayed for a myriad of reasons, including gaining planning permission for new rail tracks or roads, whereas a helicopter money drop involves paying money directly to households and can boost demand much more quickly. He said; “The challenge facing fiscal stimulus is not financing, but that it doesn’t happen. Most of the developed world can’t agree how it do it politically. In the area of the world most in need of higher aggregate demand – the Eurozone – it’s illegal. . . My view of helicopter money directly descends from Milton Friedman. . . – transfers from the central bank to the private sector financed by base money creation. Duncan like many others doesn’t emphasise this distinction. Central banks need to own the timing and quantity of any stimulus because they have distinct institutional credibility and status, and greater efficacy in decision-making.”

Whatever happens, we are entering interesting times, but the debate over helicopter money today maybe a forerunner of a much bigger debate to follow in the near future. If technology proves to have a hollowing out effect on the labour market, there is a danger that we will enter an era when there is the potential to live in an age of plenty, but lack of demand may hold the economy back. In such circumstances, we won’t so much get helicopter money, as a massive fleet of helicopters dropping money.