When the world gets closer.

We help you see farther.

Sign up to our expressly international daily newsletter.

Economy

Could Milton Friedman's 'Helicopter Money' Formula Finally Fly?

Conceived of last century by the American economist as a direct means for stimulating consumption, 'dropping' money on all households may be what Europe needs now.

Coming in for a landing ...
Coming in for a landing ...
Guillaume de Calignon

PARIS — Deflation can be solved in one fell swoop: All you have to do is drop money from a helicopter.

U.S. economist Milton Friedman came up with the drastic concept in the 1960s, before it was revived in 2002 in a landmark speech by Ben Bernanke, four years before he became Chairman of the Federal Reserve.

The idea was to give money directly to households in order to stimulate consumption and, consequently, revive inflation. The strategy bypasses the traditional — and ineffective — channel of monetary policy: bank credit. But in the arsenal of weapons at the disposal of central banks, this is definitely the nuclear option.

In 2016, back when the monetary union was on the brink of deflation, European Central Bank President Mario Draghi called Friedman's theory "interesting." Three years later, the question is whether the ECB's new monetary policy measures will have a significant impact on economic activity. If they don't, then the idea dropping banknotes from a helicopter (or more likely, sending an ECB check to every household in the eurozone) could make a comeback.

There's an ideological block.

Stanislas Jourdan, director of the NGO Positive Money, which advocates this form of economic recovery, believes that to be effective, we should be handing out the equivalent of 3% of the eurozone's GDP — roughly 1,000 euros, in other words — to every adult. He acknowledges, however, that there's an "ideological block" among policymakers who, in his words, "subscribe to monetarist dogma and are thus afraid of a hypothetical hyperinflation."

Indeed, it is unlikely that the Germans, marked as they are by the hyperinflation of the early 1920s, will be seduced by such a monetary innovation. And yet, as Pictet Wealth Management strategist Frederik Ducrozet explains: "Nothing in the mandate of the ECB prohibits the direct financing of households."

There's also the possibility of a happy medium between buying government debt and the "helicopter money" solution. The ECB could lend large amounts of long-term maturity money to banks, with rates close to zero or even negative. In fact, it is already doing this through targeted longer-term refinancing operations (TLTROs).

This time around, however, the ECB could put conditions before banks can access these loans. Banks should commit to lending directly to households at very low rates — or pay penalties. That would certainly make for a more presentable solution than dropping suitcases full of money from a helicopter.

Still, for Ducrozet, "the best and most democratic solution is not ‘helicopter money," but a coordinated fiscal stimulus for the European states that can afford it — it's the most realistic option."

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

FOCUS: Russia-Ukraine War

The Only Path To Peace With Russia? A New Iron Curtain On Ukraine's Eastern Border

With a decisive deal with Putin out of the question, the only way to create a lasting peace is to recreate some fundamental dynamics of the Cold War.

Image of president Joe Biden walking with Ukrainian President Volodymyr Zelensky in the streets of Kyiv, Ukraine.

President Joe Biden walking with Ukrainian President Volodymyr Zelensky down the Walk of the Brave on Constitution Square in Kyiv, Ukraine.

Klaus Geiger

-Analysis-

BERLIN — Volodymyr Zelensky was allowed three minutes, but he spoke for 20. In his speech at the G20 summit in November last year, the Ukrainian president laid out, in greater detail than ever before, how peace with Russia can be achieved – and maintained.

Stay up-to-date with the latest on the Russia-Ukraine war, with our exclusive international coverage.

Sign up to our free daily newsletter.

His main point: “Ukraine is not a member of any of the alliances. And Russia was able to start this war precisely because Ukraine remained in the grey zone – between the Euro-Atlantic world and Russian imperialism. Now, we do not have any security assurances either ... We need effective security assurances.”

German Chancellor Olaf Scholz echoed these words in parliament recently. “At the G20 summit, President Zelensky set out his suggestions for how to achieve a lasting, fair peace,” Scholz said. “We will help Ukraine to achieve such a peace. That is why we are talking to Kyiv and other partners about future security assurances for Ukraine.”

Scholz did not specify precisely what kind of “security assurances” he meant. But Zelensky was very specific in his G20 speech.

Keep reading...Show less

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

The latest