Coined by Milton Friedman, the term Helicopter Money refers to an uncommon economic policy tool which has been in the recent news due to economies crashing and facing major shocks due to the lock down imposed in event of the spread of a global pandemic. Here’s all you need to know about Helicopter Money, What it means to have a helicopter money drop and how it can be positive for the gold industry.
What is Helicopter Money?
Helicopter Money is an economic policy tool that is applied in a case where an economy hit recessional levels and is meant to be pulled back on track. It means increasing the printing of money notes in large sums and distributing that money to the public. As the name suggests, Helicopter Money is like a helicopter dropping money from above. American economist Friedman coined this term to denote a situation of a sudden load of money being dumped onto an economy which is struggling in order to shake it out of a large slump. This policy tools directs the Central Bank to increase the overall printing of money and subsequently increasing money supply and distribute this newly printed cash to the general public through government channels with the intention of boosting demand and regulating inflation in the economy.
Why is suddenly in the news these days?
Due to a massive virus breakout, the world facing a global pandemic and countries being under lockdown to flatten the curve of the ever increasing cases of the COVID 19, several economies are hitting an all time low because of restricted production, manufacturing and a halt in all other major economic activities all across the globe. In such a situation, Indian states and state ministers are taking into consideration putting this economic tool, Helicopter Money, into action in the country to regulate slumping economies within the country. Recently, the Chief Minister of Telangana, K C Rao asserted that the use of Helicopter Money tool can aid the states during this time of economic slowdown and help them come out of this morass. He reached out to the authorities for releasing 5% of the GDP funds by the way of Quantitative easing. He claimed that this quantitative easing is the only way that our Indian states will be given a boost to deal with the current situation and that in order to help state governments and financial institution in accruing funds and regulating demand, RBI should counter these times of economic crisis using strategic planning and policies and following this policy of Helicopter Money and Quantitative Easing is one of them.
What is the difference between Helicopter Money and Quantitative Easing?
Helicopter money and quantitative easing may seem like the same thing but there are some characteristic differences between the two.
Helicopter drop or helicopter money is a fiscal policy that essentially results in an increase in the money supply or the amount of money in circulation in an economy. This policy was first introduced by an American economist Milton Friedman in the year 1969. It is a theoretical and an orthodox policy tool that recessional economy used to regulate the economic slump. The entire concept of helicopter money involves the central government or the central bank increasing the amount of money printing and distributing that money to the public and the name helicopter money is a metaphor to a situation where as if the money was being dropped on distributed by a helicopter.
On the other hand, quantitative easing also increases the money supply and lowers the interest rates in the economy but it doesn’t happen by increasing the amount of money in supply but instead, the central bank follows this policy tool by purchasing financial securities or other government securities from the market to provide a boost to economic growth. Unlike helicopter money, quantitative easing does not directly impact the people or the general public as the printed money that is created is used to purchase assets and not given directly to the public to increase consumer spending.
The idea of using the policy tool of Helicopter Money was popularised by former Federal Reserve Chairman, Ben Bernanke in his speech that he delivered to the National Economists Club in the year 2002 and how it can be used to combat deflation or economic slump, which he proved by using this technique to tackle the Great Recession in 2008-09. Bernanke was once again in the limelight when he was in conversation with Shinzo Abe, Japanese Prime Minister and Haruhiko Kuroda of the Bank of Japan, when the country was facing economic stagnation in the year 2016 and authorities and officials were considering using the tool Helicopter Money to combat economic slowdown in Japan.
Helicopter Money and its Impact on the Gold Industry:
When it comes to consumers buying gold, it is safe to stay that it has been a means of investment for a long time, especially in India. Helicopter money can be positive for the gold market, in case the RBI decides to implement this policy tool just like was done by the Telangana chief minister. Helicopter money and the money generated by it ultimately end up India hands of the people who largely spend it on purchasing consumer goods. Helicopter drop raises the chances of inflation but in its initial stages, it can prove to be beneficial for the gold market as it may create a safe haven bid for gold and people may invest more in gold as soon as they get the money from the helicopter drop, if inflation is predicted to rise higher in the coming future.
The Indian states and their economies and even the national economy as a whole is facing a serious setback and fall down due to the lock down and a halt in all important production activities and economic practices. In such a time, as initiated by K C Rao in Telangana, there are chances that more Indian states implement the policy tool of Helicopter Money to increase the amount of money supply, to boost consumer spending and to also regulate economic activities, increase in consumer demand and also the inflation levels.