Money may not grow on trees, but does it fall from the sky? - Alaska Permanent Capital Management


Money may not grow on trees, but does it fall from the sky?

Brandy-NiclaiHelicopter money and how it could affect you as an investor.

Imagine one evening you are enjoying dinner and you hear a helicopter flying over your house. You look out and see cash falling out of the helicopter right in your yard! The helicopter continues to fly and drops cash for all of your neighbors.

Did your neighborhood just win the lottery? No, central bankers just pulled the trigger on a monetary finance tool not yet tested in a modern major economy. The hope is that you and your neighbors will spend the money creating economic activity and inflation.

Helicopter money is an idea proposed by famed economist Milton Friedman over 40 years ago to describe a monetary finance tool whereby the central bank “prints money” to finance fiscal expansion.

Before you start looking for money falling from the sky, this potential policy tool would not be implemented the way Friedman described. It could take many forms, but one possibility would be the government granting a universal tax rebate to all households that is financed by the central bank.

Why are financial publications buzzing about helicopter money now?

Helicopter money is being debated by economists now because global growth and inflation remain subdued. This despite more than 600 interest rate cuts and $12 trillion of asset purchases by central banks around the world. While the rate of GDP expansion may be less than desired, these stimulus measures did help us avoid another great depression in 2008.

Growth and inflation have been better in the U.S. when compared to Europe and Japan. Nevertheless, this expansion has often felt slow and weak. There have been 23 periods of economic expansion in the U.S. since 1900 and the current period (at 81 months) is the fourth longest on record. Despite its length, the cumulative growth in real GDP during this expansion is the lowest for all periods since the end of WWII. One of the reasons growth remains so sluggish is that central bank actions have failed to spur a dramatic increase in bank lending (a major driver of economic growth).

Given current debt levels, there is little support for traditional fiscal policy stimulus (i.e. tax credits or infrastructure spending funded by government debt). Helicopter money, however, could finance expansionary fiscal policies without relying on banks to increase lending or issuing new government debt.

This hybrid of monetary and fiscal policy sounds too good to be true and is certainly controversial. Proponents and opponents have developed an equally long list of potential pros and cons.

How could helicopter money affect you as an investor?

Equities, particularly developed international equities and gold could rally if policy makers are successful and actually spur growth and inflation. Some economists believe there could be some form of a helicopter drop if deflationary pressures intensify particularly in Japan and Europe. U.S. growth has been more resilient so a helicopter drop is not likely in the near future. However some see it as a viable option in response to the next recession.

APCM’s Best Advice

Economist John Kenneth Galbraith is famous for many quotes, one of which is:

“One of the greatest pieces of economic wisdom is to know what you don’t know.”

We don’t know if or when helicopter drops may actually occur, nor do we know if they will be the silver bullet to spur growth and inflation. Macro analysis is complex and relying on consistent, accurate and timely predictions is a tough investment strategy with serious financial consequences.

So, remain diversified! If you own stocks have both domestic and international exposure. APCM also recommends diverse (not only gold) commodity exposure depending upon your individual risk profile. Commodity exposure provides diversification benefits in times of higher than expected inflation.

If you want to learn more about helicopter money and other current monetary policy ideas, check out Ben Bernanke’s blog at the Brooking Institute. Recall Bernanke was Chairman of the Federal Reserve during the height of the last crisis and instrumental in many of the policies that have been implemented since.

Brandy Niclai, CFA®
Portfolio Manager



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