Helicopter Money

The papers today are full of the phrase “quantitative easing” - which is a rather dry term to describe a decision by a Central Bank to turn the taps on and basically print more money - others are calling it helicopter money - imagine taking a helicopter up into the skies and throwing cash into the prevailing winds.

One method of increasing the money supply is for the central bank (in our case the Bank of England) to be given the green light to be allowed to expand its own balance sheet by buying commercial and mortgage debt from other financial institutions - the Bank would pay for these ‘securities’ by printing money and allowing the banks and other lenders to replace some of their bad (“toxic”) debt and replace it with good old fashioned cash.

A stronger cash base might then act as a catalyst for a recovery in lending to personal and corporate borrowers.

Why is this approach being considered in the UK and in the EU?

One reason is that official interest rates have been slashed close to the nominal floor of zero per cent and might have little effect on the quantity of borrowing / lending - the so-called liquidity trap. Banks will not start lending again until they have de-risked and restored their capital base to the right level -in the short term this means lending out less regardless of the political pressures from the government.

Crowding out?

Secondly the markets are spooked by just how much the government is planning to borrow - indeed money that is being used to buy the huge rise in the market supply of government bonds is money (in pension funds, insurance funds etc) that is then crowded out and does not find its way into investments in equities or corporate bonds. Too much of a fiscal easing risks creating the crowding out effect and taxpayers are not stupid - they know that borrowing today will lead to a permanent rise in the tax burden for the next generation.

So keep your eyes on the skies above you .... the helicopter pads are being readied as we speak.

Here are some suggestions for further reading

Paul Mason on Newsnight (a superb piece)
Paul Mason explains what lies at the root of the banking crisis that has led the Bank of England to cut interest rates to their lowest level since 1951

Guardian: World’s central banks march towards zero rates

Bank of England looks at injecting cash