FRANKFURT, Germany – Helicopters dropping money in the streets: it's a vivid metaphor for a drastic form of central bank stimulus that is gaining attention as a possible way to help the global economy out of its malaise.
The idea of "helicopter money" is straightforward: central banks would create new cash and give it to people, like an air drop of supplies. As people spend or invest it, economic growth and inflation would rise.
The potential efficacy is tempting in a world where central banks are struggling to nudge up low inflation and growth with their current tools: repeated interest rate cuts — often below zero — and extraordinary stimulus programs like bond purchases.
As the world economy faces the threat of deflation, a long-term weakness in prices and wages that kills off growth for years on end, the sound of choppers bearing bank bags is being heard more and more in discussion among economists.
"Helicopter money may be the next big thing, as policymakers reach the limits of standard unconventional practices," says Andrew Kenningham, senior global economist at Capital Economics in London.
European Central Bank head Mario Draghi was asked this month about the possibility of using "helicopter money" after the bank announced a further round of stimulus measures, including negative interest rates and more massive bond purchases aimed at pushing up inflation and growth.
"We haven't really thought or talked about it," he said. "It's a very interesting concept that is now being discussed by academic economists and in various environments. "
Nobel laureate economist Milton Friedman first proposed the idea almost 50 years ago. It is close to — but not quite the same — as quantitative easing, the method central banks such as the U.S. Federal Reserve, Bank of Japan, Bank of England, and ECB have used since the financial crisis and Great Recession of 2007-2009.
Under quantitative easing, central banks buy government bonds from commercial banks. Central banks pay for the bonds by electronically increasing the amounts of money in the accounts that the commercial banks are required to hold at the central bank. When the account balance goes up, new money is created.
There's just one problem. The money is sitting in a reserve account. If the bank itself is shaky, or has become cautious about lending, the central bank can print all it wants, but the new money won't reach people.
Helicopter money gets around that dependence on banks. It aims to put the money directly into circulation.
And helicopter money is supposed to be accompanied with a guarantee that it is a permanent addition to the money supply — unlike quantitative easing, which central banks say they eventually intend to unwind.
As Friedman put it in a 1969 paper, "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." They then spend it, increasing economic activity and pushing up inflation.
Other top economists have put forward versions of the same idea. British economist John Maynard Keynes said the government should bury bottles of banknotes in old coal mines, and let people dig them up to increase the supply of money. In 2002, Ben Bernanke, at the time a member of the Federal Reserve's board of governors and later its head, proposed a helicopter drop as a way for Japan to get out of its deflationary quagmire.
Money-printing can be a disaster, if governments come to depend on it or central banks lose the courage to withhold it when it's not needed. It can result in hyperinflation, as it did in Germany in the 1920s and more recently in Zimbabwe.
The time to do it, backers of the idea say, is when the economy is so slack that inflation is not a worry.
In theory, central banks could just print banknotes and hand them out. But most current discussion focuses on Bernanke's specific version of how helicopter money could best be delivered. The government delivers a tax cut, and then issues more bonds, which the central bank promises to buy, in effect financing the tax cut with new money.
Bernanke said such a step would "almost certainly be an effective stimulant to consumption and hence to prices."
There are a few obstacles. Unlike quantitative easing, Bernanke's version of helicopter money adds more government debt that could undermine confidence.
To fix that, the central bank could commit to keep buying bonds, so the government could be certain it could roll that debt over.
Alternatively, the central bank could simply forego repayment on the government's debts. But that would then put a large accounting loss on the central bank's accounts, which might undermine public confidence.
In Draghi's case, the European Union treaty forbids the European Central Bank from financing governments. Legal and political opposition could be insurmountable. Jens Weidmann, one of two German members of the ECB council, has rejected the idea, pointing to its impact on the ECB's own finances.
Moreover, many governments have resisted spending more. Germany's finance minister, Wolfgang Schaeuble, has proposed a 2017 budget with a slight surplus. Congressional Republicans in the United States say they want less government spending and debt, not more. Britain's Conservative government has stressed deficit reduction, not stimulus.
Japan, where deflation has lasted longer and where the government has huge debts, might be a more likely candidate, thinks economist Kenningham.
"For the ECB, it's very hard to make any radical changes," he said. "I think Japan might be the place where it's most likely to be tried, because they have bigger fiscal problems and less of a problem coordinating fiscal and monetary authorities, since it's one country. "
"I don't think it's going to happen any time soon, but if we are stuck in a very, very low inflation environment, and a very high public-debt environment, for another five years, then things that now seem improbable may end up getting implemented."