The plain-spoken economist Alice Rivlin has observed, “The job of the central bank is to worry.” According to much of what we’ve been seeing lately, central banks now have an awful lot to worry about. They’ve tried quantitative easing, negative interest rates and currency devaluation with relatively little success. Since 2008, they’ve collectively implemented a jaw-dropping 637 interest rate cuts with barely any inflation or successful stimulus to show for it.
On January 29th the Bank of Japan jump-started another round of quantitative easing and jumped off the side of rationality into negative interest rates. European Bank President Mario Draghi’s soon followed with controversial moves along the very same lines.
Quantitative easing, in particular, has been drawing criticism from economists for years. It debases currency and fails at what it’s supposed to accomplish – motivating banks to lend money and thus stimulate investment. In the July 11, 2014 issue of Fortune, Carnegie Mellon economist, Alan Meltzer, had this to say:
“With $3.5 trillion in excess reserves sitting in the banking system, what good can the Fed do by adding to it that the banks couldn’t do on their own? The answer is nothing. Whatever has happened in the economy isn’t being caused by quantitative easing.”
Meltzer points out that corporations have exploited low interest rates to issue debt and buy back their own stock, but haven’t used the opportunity for the purpose intended – for them to invest in their own businesses.
Given Meltzer’s skepticism, and recent criticism of ECB President Draghi’s anemic QE attempts, we should wonder whether the job of the central bank is not only to worry – but to despair when just worrying doesn’t work. But wait! Before despairing, central banks have one more trick left in their monetary tool boxes: Time to bring in the helicopters.
Yes, you read it right – helicopters. Intended more as metaphor than actual policy proposal, the concept of “helicopter money” was suggested by the conservative economist, Milton Friedman, back in 1969. In a paper entitled “The Optimum Quantity of Money,” Friedman put forth the idea of a one-time check written to everybody in the economy:
“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.”
The thinking behind the proposal is, in a period of deflation, consumers will spend their windfall, and thereby inject much-needed inflation into the economy. Discussion of helicopter money seems to surface every few years when the going gets tough for central banks.
In a 2002 speech, former Fed Chair Ben Bernanke alluded to Friedman’s helicopter-drop proposal as a way to tackle deflation, after which he was dubbed “Helicopter Ben” by critics. Yet according to a March 22nd BloombergView article by columnist Mark Gilbert, helicopter money is being widely discussed by central bankers and economists.
But we shouldn’t get too excited about such discussions. As Friedman’s paper suggests, a check to consumers would be a one-time event. What would central banks do for an encore if that helicopter drop didn’t stimulate enough inflation? Haven’t they already tried the money-printing idea and failed?
With helicopter money as an option, apparently the notion of a falling dollar has taken on a whole new meaning. But let central bankers despair over that. In the meantime, keep your eye on the true prize – your own portfolio. Don’t depend on the government to help you build personal wealth, or to protect what you’re going to need in the future. Gold holds steady – with or without paper money from the skies.