As the mother of three children between the ages of 8 and 13, I am very familiar with the concept of a helicopter parent. As I pull into the parking lot of a sporting event late, with my kids still struggling to put on their team uniforms and missing socks and other appropriate accessories, I see those parents in the distance—and their children look nothing like mine.
Helicopter parents of course mean well, trying to do everything possible to ensure their children are successful. They hire private tutors and coaches, deck them out in all the latest, most expensive accessories and hover over their children in the hopes that they can protect them from any disappointments or failures.
For nearly a decade, we've seen an interesting phenomenon evolve with major central banks acting like helicopter parents. They've used experimental monetary policy since the global financial crisis in order to help their respective economies. In trying to prevent a deterioration in economic conditions and support job growth, central banks have hovered over their economies, employing unconventional tools such as quantitative easing, zero interest rate policies (ZIRP) and even negative interest rate policies (NIRP). They've been, well, the central bank version of helicopter parents.
Creating more money
And now central banks are starting to talk about actual helicopter money, which was originally proposed by economist Milton Friedman back in the 1960s as a way to combat extreme deflation. Helicopter money, at its most basic, is the printing of money by central banks (without taking on any additional debt) to then be spent on government programs or given directly to individuals. The concept of helicopter money has received renewed interest lately because of a recent book by Adair Turner entitled Between Debt and the Devil – Money, Credit and Fixing Global Finance.
Helicopter money recently moved from an abstract economic theory to a possible tool in the not-so-distant future when it was mentioned during European Central Bank (ECB) President Mario Draghi's press conference last week (just as the concept of negative interest rate policy in the US was mentioned in Fed Chair Janet Yellen's testimony on Capitol Hill, giving it credibility). Specifically, Mr. Draghi, when asked about helicopter money, did not immediately dismiss it outright. Instead he said it was "a very interesting concept," although he admitted the ECB has not "really studied yet the concept."
Ironically, helicopter money may make more sense than other unconventional monetary policies. Keep in mind that monetary policy acts more like a blunt instrument, not a surgical tool. You can inject liquidity into the economy and you can lower interest rates—but you can't ensure that people actually spend the money, thereby enabling the economy to grow. In other words, monetary policy is like bringing the proverbial horse to water—you can't make it drink. But helicopter money may be unique in that central banks can make the horse drink because they are actually spending the money on items such as infrastructure. Helicopter money may be the most surgical tool-like portion of monetary policy.
Fiscal stimulus
Another phenomenon that we've experienced in the past decade—and it's not a coincidence—is that there has been a reluctance to enact fiscal stimulus in the US and elsewhere. Unfortunately many developed economies are running annual budget deficits on a regular basis in addition to having high overall debt levels. These countries are focused on trying to cut spending—rather than spend more.
In contrast, consider the post-World War II period in the US. At that time, the US economy had a higher debt-to-GDP level than it has now, having borrowed heavily to help get through the Great Depression and World War II. However, the US employed a combination of fiscal policy and monetary policy in order to stimulate its economy. One could make a strong argument that the reason we haven't been able to engineer a more robust economic recovery this time around is that it has been a single-engine recovery—only powered by monetary policy, which can only take you so far.
Multiplier effect
John Maynard Keynes, the late British economist, argued that when there is a drop in spending from the consumer or from business investment, the government must step in and spend more in order to maintain the same level of aggregate demand—and therefore prevent unemployment.
An excellent example of fiscal stimulus can be found in infrastructure spending, which is often considered the most effective form of fiscal policy in terms of its impact on the economy. The Congressional Budget Office estimates that infrastructure spending has a 1.8 multiplier effect. In other words, every dollar spent on infrastructure produces $1.80 in economic benefits. (Bivens, 2014) And infrastructure spending, as we saw in the 1930s, can result in a ripple effect. As buildings, bridges and roadways are built or repaired, they can then enable greater commercial movement and trade.
Spender of last resort
Helicopter money is not a magic fix and some economists worry that it could result in higher inflation. In some countries such as the US, there is growing public disapproval of unconventional central bank actions given that central banks are not directly accountable to the people. In addition, central bank helicopter spending could violate existing laws—particularly because it would be bypassing legislative bodies in order to spend.
As central banks consider new and experimental tools to boost growth, helicopter money stands out for its potential to more directly and powerfully impact the economy. While it certainly has its drawbacks, the concept of becoming a "spender of last resort" is worth consideration by central banks such as the ECB.
Subscribe Today
The Upshot is available as a subscription for financial professionals only. New issues will be delivered via email every Monday. Visit us.allianzgi.com/theupshot to learn more.
Follow Us on Twitter
For more investment insights and market perspectives from our global research network, follow @AllianzGI_US on Twitter or visit us.allianzgi.com.
About the Author
Kristina Hooper is the US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Important Information
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
A Word About Risk
Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
There is no guarantee that an active manager’s investment decisions and techniques will be successful. It is possible to lose some or all of your investment using active management.
Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585, us.allianzgi.com, 1 800 926 4456.
AGI-2016-03-21-14770
© Allianz Global Investors Distributors LLC
