Helicopter money: central banks' last resort

helicopter money

Imagine cash spewing out of a helicopter over your neighborhood.

Central banks -- struggling to spark growth -- are basically talking about it.

"It's a last resort of a desperate economy," says Kathy Jones, chief fixed income strategist at Charles Schwab. "I wouldn't rule it out."

Ahead of the Federal Reserve's meeting that started Tuesday, an old metaphor -- helicopter money -- is gaining new traction as world leaders try to improve global economic growth, which the IMF recently described as "fragile."

Famed economist Milton Friedman first introduced the idea of helicopter money in 1969. Essentially, as former Fed Chair Ben Bernanke recently put it, the Fed would write a huge check to the U.S. Treasury office, which would then send tax rebates (read: cash) to millions of Americans.

Related: Yellen: Fed to move cautiously

The thinking and hope behind such an action is that Americans would then spend the money. Consumer spending makes up the majority of U.S. economic activity so more spending would boost the country's growth prospects, which are currently very dim. First quarter economic growth figures come out Thursday and growth is projected to be below 1%.

No one expects the Fed to announce that it will start a helicopter money program or even make a move on interest rates when its meeting ends Wednesday. But mere talk of helicopter money illustrates how desperate central bankers are to spark growth.

Japan and the European Central Bank are using negative interest rates to stimulate spending. The ECB is also in a bond buying spree. Last year China's central bank spent billions to ease the country's economic slowdown.

Experts across the spectrum say Japan, which has struggled with deflation, is the most likely to consider using helicopter money. But so far its central bank chief has denied any interest in the idea.

Related: U.S. economic growth forecast drops

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Reporters asked ECB President Mario Draghi last week about helicopter money. He says the ECB has no such plans and that it hasn't been discussed. He argues that helicopter money is fraught with challenges.

"It's a very interesting concept," Draghi noted. However: "The concept is fraught with operational, legal and institutional difficulties. But the bottom line is we have never discussed it."

One person who isn't dismissing helicopter money is Bernanke. In fact, in a 2002 speech he referenced Milton Friedman's famous lines, thinking everyone would know what he was talking about. But no one really did, and Bernanke was dubbed at the time as "helicopter Ben."

Related: America's part-time workforce is huge

In an April blog post, Bernanke says helicopter money is "extremely likely to be effective" if it's ever used, albeit as a last resort.

He argues helicopter money from a central bank would be better than Congress increasing spending or creating a tax cut -- both of those options risk driving up the national debt or making it more expensive to pay off debt down the road.

But if the Fed paid for a tax rebate, America's debt burden wouldn't go up, Bernanke argues. Helicopter money could be used in other ways too, such as financing a major infrastructure program, creating jobs, more incomes and higher spending.

Helicopter money still faces key roadblocks. Who decides how much money and how it's implemented are thorny topics. There's also a risk that such a program could muddle the independence central banks are supposed to have from lawmakers and politics.

No matter whether it is ever considered, bottom line is that even talk of helicopter money is just a sign of the times that central banks may consider anything to reboot the global economy.

"Helicopter money could prove a valuable tool," Bernanke wrote. "Under extreme circumstances...such programs may be the best available alternative. It would be premature to rule them out."

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