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20 June 2016

Helicopter money explained

Ian Spreadbury, manager of Elite Rated Fidelity Strategic Bond fund

Having finally got our heads around the term 'quantitative easing', 'helicopter money' is now being bandied around as the next unconventional method from the central banks to try to kickstart the global economy.

At the moment, the world continues to flirt with deflation. During deflationary periods, when the costs of things go down instead of up, people and companies hoard money instead of spending it. Why pay £100 for something today, when it will cost £95 next month? Lower demand for goods and services leads to further price cuts and businesses going bust. It's a downward spiral and one central bankers want to avoid at all costs.

In simple terms, helicopter money is a more direct way of getting people to spend money. It's not a new idea. David Hume, an 18th century philosopher, asked what would happen if some good fairy went around doubling the money in everybody’s pockets. In 1969, Nobel Laureate Milton Friedman merely replaced the fairy with a helicopter.

In a recent update, Ian Spreadbury, manager of the Elite Rated Fidelity Strategic Bond fund, said: “As unbelievable as it seems, respected economists are now beginning to discuss helicopter money as a viable strategy to boost economic growth. Although we are far away from it in the US, UK and most other parts of the world, Japan could be a test case for helicopter money in the future after 20 years of zero nominal growth.”

He said that helicopter money could take the form of a central bank printing money to fund tax cuts, or giving it to governments to spend on building infrastructure. It could also be given directly to the private sector.

So helicopter money is a literal windfall to be used to help the economy grow. It may be nice for a shopping spree, but the hyperinflation that could ensue may not be so pleasant.

Ian continued: “History has shown us that this type of policy has been difficult to implement. When it has been used in the past in Zimbabwe, Hungary and Germany, it has been associated with hyperinflation, and this is one reason why central bankers are unwilling to discuss the idea of helicopter money openly.

“If it were introduced, such a policy would have to be carefully managed by an independent central bank with targets around growth and inflation. This would ensure that if additional money printing started to push up inflation expectations, policymakers could clamp down quickly. Because of these risks, I would view this type of policy with extreme caution.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Ian's views are his own and do not constitute financial advice.