Business / Economy

Helicopter cash presents hopes for Japan, but history shows it can trigger hyperinflation

by Rich Miller

Bloomberg

As Bank of Japan Gov. Haruhiko Kuroda confronts pressures to launch helicopter money, he could do a lot worse than remember the life — and death — of Viscount Korekiyo Takahashi.

As Japan’s economic czar in the early 1930s, Takahashi initiated the equivalent of helicopter money, using the BOJ to directly finance deficit spending by the government. Coupled with abandonment of the gold standard, Takahashi’s reflationary policies “brilliantly rescued Japan from the Great Depression,” Ben Bernanke, a former chairman of the U.S. Federal Reserve, said in 2003. A steep yen decline helped.

Unfortunately, the tale does not end there. After Takahashi subsequently sought to rein in deficits by slashing military spending, he was assassinated in 1936 by rebelling army officers. A breakdown in fiscal discipline and an inflationary surge followed as Japan geared up for World War II.

So what lessons should be drawn today as Kuroda seeks to stave off a deflationary downturn?

As Bernanke noted, Takahashi’s money-financed fiscal program worked. Yet turning off the budgetary spigot afterward proved impossible — with adverse consequences for the nation’s finances and economy.

First conceived by economist Milton Friedman in 1969, the term helicopter money has become shorthand for a fusion of fiscal and monetary policy. Rather than issuing debt, a national government draws newly printed money from the central bank. It then injects that cash straight into the economy with tax cuts or spending programs. The contours of how that would work are ill-defined.

Japan is at the forefront of the chopper cash debate because it is closest to the limit of what monetary policy can do for the economy on its own. The BOJ’s balance sheet totals more than 80 percent of gross domestic product.

Other central banks are not ruling out adopting such a radical strategy should the situation turn dire enough.

European Central Bank chief economist Peter Praet said in a March newspaper interview that handing out money is an “extreme” step that theoretically “all central banks can do.”

Fed Chair Janet Yellen told reporters on June 15 that close coordination of fiscal and monetary policies is “something that one might legitimately consider” in extremity.

On its face, helicopter money sounds like something economists have long insisted does not exist: a free lunch. The government gets money from the central bank that it does not have to pay interest on and does not have to pay back and then gives it away to its citizens.

The trouble is that it is potentially a path to perdition as its repeated usage ultimately spawns hyperinflation. See the U.S. Confederacy during the 1861-1865 Civil War or Zimbabwe in the last decade.

That is why many central banks, including the BOJ, have strictures against it, although a Japanese inflationary surge seems remote for now. The BOJ by law is prohibited from buying government bonds directly from the Finance Ministry. Instead, it purchases them from intermediaries such as banks.

“Unless the existing legal framework changes, helicopter money isn’t possible,” Kuroda told Japanese lawmakers on April 19.

The chatter about helicopter money is “largely a scam,” said former International Monetary Fund chief economist Olivier Blanchard. What is important is increasing fiscal stimulus.

Whether that is financed by issuing bonds at roughly zero interest rates or by drawing money from the central bank “doesn’t make a whole lot of difference,” Blanchard, a senior fellow at the Peterson Institute for International Economics, said in a July 14 interview.

Japan is already engaged in a strategy that involves helicopter money, Etsuro Honda, an adviser to Prime Minister Shinzo Abe, said this month.

Because of the negative yields on Japanese government debts, banks have little incentive to buy them unless they expect to sell them later to the central bank under its asset buying program, said Kohei Iwahara, director of economic research at Natixis in Tokyo.

“It can be argued that the central bank is doing helicopter money in reality,” he said.

Proponents assert that there are advantages to purer forms of such cash injections. For one thing, the government does not have to pay the money back, as it would have to if it borrowed in the bond market.

Then there is something called Ricardian Equivalence, named after 19th century economist David Ricardo.

It posits that debt-financed government spending does not lift an economy because citizens know it will have to be paid for with future tax increases. So they save more now to prepare for that, depressing demand.

In the case of helicopter money, such a consideration would be moot. “Unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens,” Bernanke wrote in an April posting on his Brookings Institution blog.

Other pros of helicopter money include:

Lifting too-low inflation expectations. “If they were to do this, then it may act as a jolt to expectations,” said Leon Berkelmans, a director at the Lowy Institute for International Policy in Sydney.

Providing more kick by boosting the velocity at which cash circulates throughout the economy, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. While buying bonds from banks injects money into the financial system, the cash has had limited economic impact because cautious consumers and companies have held rather than spent it.

Spreading the money around more equitably than quantitative easing, which has raised prices of bonds and other assets predominantly held by the wealthy. “It would be more broadly distributed,” said Peterson Institute senior fellow Joseph Gagnon.

Limiting market distortions like those caused by QE, which has helped pushed yields on many bonds below zero.

Perli said he expects Japan to adopt “something with the flavor” of helicopter money in coming months. In its simplest form, that might involve a fiscal stimulus accompanied by an equal amount of bond purchases by the BOJ, he said.

While that would not qualify as pristine helicopter money, the market would likely see it as “de-facto,” chopper cash, Perli said in an email.

“It’s time to think the unthinkable as monetary policy is pushed further to the extreme,” said David Mann, chief Asia economist at Standard Chartered PLC. “We might actually see policies that economics students only ever talked about in an imaginary or long ago world (i.e. the 1930s) become real.”