As we all know that due to the corona virus we all are in the state of lockdown.
As most of the people are staying home and business closed down government and central bank around the world is considering various ways to make economy moving. The consumption of goods and services or consumer spending is one of the key drivers in the economy. Consumer spending accounts for around 58% of the world’s GDP. So if consumer’s spending stops or slow down than economy runs into big trouble. The effects of this corona virus and lockdown has resulted in many business being closed down and many of people losing jobs. Also there has been news that many of the people will lose and becomes unemployed. Now this all will effects the spending of the consumer as there will be fear of uncertainty of their future. As there is fear of economy being crashed the government around the world are taking measures like cutting off the interest rates so that business can be continued but since it is cheaper to buy money this does not mean that people will want to take loans as they are not sure about future. Then the concept of helicopter money arises let us study the hot debated concept of helicopter money which has been discussed all around the world today.
Let us first understand the concept of helicopter money
- Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero.
- It is also referred to as a helicopter drop, in reference to a helicopter throwing money from the sky. Under such a policy, a central bank “directly increase the money supply and, via the government, distribute the new cash to the population with the aim of boosting demand and inflation.”
- The name “helicopter money was first introduced by Nobel winning economist Milton Friedman in 1969. Where in his famous paper “The Optimum Quantity of Money” where he included the following parable:
“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”.
Is there any country which has implemented this helicopter money?
Yes recently Hong Kong has decided to give its permanent resident aged 18 and above to give US $ 1,200 to ease the burden on individuals and companies.
Also japan has also in past had applied this concepts to overcome recession.
Pros of helicopter money
- Helicopter money does not rely on increased borrowing to fuel economy which means that it doesn’t create more debts and interest rate can remains unchanged.
- Generally helicopter money boosts spending and economic growth more effectively because it increases aggregate demand i.e demands for goods & services immediately.
- While the government drops money that comes from debts might not boost the consumer spending due to debt needing to be repaid, if it often thought that money finance will stimulate the economy.
Cons of helicopter money
- One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market. As more money is printed and supply increases, the value of the domestic currency could significantly decrease. It could also discourage speculators from buying the currency as it is less likely to perform well.
- A country’s central bank sets its interest rates to reach economic growth targets. However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan). Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
Conclusion: Every coin has two sides. Similarly helicopter money also has two parts and it has benefits in short run however may deflate the value of money in long run due to which most of the government around the world only want it to be used in worst case scenario.