We are all helicopter pilots now

In Ben Bernanke’s famous 2002 helicopter speech, he made the point that the Fed has numerous tools to fight deflation, even if interest rates was at the zero bound:

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

He went on to say that the coordination of fiscal and monetary policy amounted to a helicopter drop of money:

Each of the policy options I have discussed so far involves the Fed’s acting on its own…A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

In his latest blog post, Bernanke expanded on that point. Monetary policy has limits by itself. Helicopter money is fiscal + monetary policy:

In more prosaic and realistic terms, a “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock. To get away from the fanciful imagery, for the rest of this post I will call such a policy a Money-Financed Fiscal Program, or MFFP.

He concluded that helicopter money is not necessary in the US, but they may be useful tools in other parts of the world:

Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out.

Consider the Bernanke helicopter money prescription. The government spends by borrowing and the central finances the spending by buying up the debt and printing money. It sounds positively Japanese. Abenomics, anyone?

Helicopter money = Draghi Grand Plan 2.0

It is also sounding European. Long time readers may recall that I wrote about the Draghi Grand Plan to save the eurozone (see Mario Draghi reveals the Grand Plan written February 26, 2012). Draghi talked about his solution for Europe in a WSJ interview. His Grand Plan consisted of the following elements:

  • The ECB does what it can to hold things together and eliminate catastrophic tail-risk with band-aid solutions, At the same time…
  • Member states implements structural reforms, in the form of:
    1. “Good” austerity: Lower taxes, less spending on social services
    2. Labor market reforms: This isn’t just a Thatcherite solution of making easier to fire people, but to address the horrific youth unemployment problem because the older generation are ensconced in jobs with virtual lifetime security.
In a subsequent speech on October 14, 2014 at the Brookings Institute, Draghi unveiled his Grand Plan 2.0. In my post The Draghi Grand Plan 2.0, I wrote:

In his speech, Draghi outlined the third leg of Grand Plan. In addition to the components of Grand Plan 1.0, Grand Plan 2.0 includes infrastructure spending for member states that have the fiscal flexibility to do so. In practical terms, it’s an infrastructure fiscal spending for structural reforms bargain within the eurozone.



In other words, the addition of fiscal tools to monetary policy as a way of reviving growth in the eurozone. The Draghi proposal doesn’t go as far as Bernanke helicopter money, largely because the *ahem* Growth and Stupidity Pact doesn’t allow for wild fiscal spending and the ECB mandate doesn’t allow for debt monetization. Nevertheless, it is a step in the right direction.

The ECB seems to be trying to nudge eurozone governments in that direction. Last week, Francois Villeroy de Galhau of the Banque de France called for the creation of a eurozone finance minister:

European Central Bank Governing Council member Francois Villeroy de Galhau on Monday renewed his call for the creation of a Eurozone finance minister, saying that monetary policy cannot fill the gap left by poor euro-area economic policy coordination.

“Clearly monetary policy cannot be a substitute for economic policy coordination or the lack of reforms,” Villeroy de Galhau told a conference in Paris.

“The most urgently needed part of EMU reform is to set up a strong institution, led by a euro area finance minister, to fully coordinate national fiscal and structural polices,” he added.

Villeroy de Galhau, who heads the Bank of France, made no comments on current monetary policy in his speech.

The creation of such a post would be a crucial first step in the coordination of eurozone-wide fiscal policy:

He said the main tasks of the Eurozone finance minster would be prepare a collective economic strategy for the euro area, supervise its implementation and to oversee a “Convergence Fund” that could evolve into a euro-area budget.

The minister would also be responsible for Eurozone crisis management and oversee European Stability Mechanism operations, Villeroy de Galhau said.

Noting that studies have shown that poor economic coordination may have cost the euro area between 2% and 5% of GDP since the financial crisis, Villeroy de Galhau said “economic policy as a whole, not central banking alone, is indeed the only game in town.”

As Draghi is used to saying when he cooks up his schemes, in very a typical ECB fashion: “Sequencing, sequencing…”

Becoming helicopter pilots

When outsiders look at Europe, they see a continent of bickering countries held together by a mish-mash of rules that appear to be sub-optimal and inhibit growth. When I look at the European Union, I see a continent determined to avoid the deadly wars of the last couple of centuries, held together by a number of so-called flexible rules that can be bent through back-room negotiations. I have no doubt that in the next crisis, we will see some form of helicopter money in Europe.

Ray Dalio of Bridgewater Associates wrote an essay in February of how he thought fiscal and monetary policy would eventually evolve. Negative rates won’t work. The answer was some form of helicopter money:

As a result, Monetary Policy 3 will have to be directed at spenders more than at investors/savers. In other words, it will provide money to spenders and incentives for them to spend it. How exactly that will work has to be determined. However, we can say that the range will extend from classic fiscal/monetary policy coordination (in which debt to finance government spending will be monetized) to sending people cash directly (i.e., helicopter money), and will likely fall somewhere between these two (i.e., sending people money tied to spending incentives).

To be clear, we are not describing what will happen tomorrow or what we are recommending, and we aren’t sure about what will happen over the near term. We are just describing a) how we believe the economic machine works, b) roughly where we believe that leaves us, and c) what these circumstances will probably drive policy makers to do—most importantly that central bankers need to put their thinking caps on.

The evolution of policy direction seems clear. When push comes to shove, we will see helicopter money in the next crisis.


Richard Nixon famously once said, “We are all Keynesians now.” Today, we are all becoming helicopter pilots now.

9 thoughts on “We are all helicopter pilots now

  1. If I may offer a word of criticism, could you please stick to your technical analysis, which is excellent, and stay away from economic analysis, where your Keynesian approach is not helpful to you or your readers in understanding how the economy actually works. As it happens, there was a good short piece on helicopter money showing why it is useless and damaging to the real economy: https://mises.org/blog/helicopter-money-rescue

    Keynesianism has gotten the world into this mess, of soaring debt to produce “stimulus” that only stimulates asset speculation. More Keynesianism isn’t going to get us out of it.

    As the mises.org post points out “Common sense states that you cannot repeal the law of scarcity by printing intrinsically worthless pieces of paper to finance private or government expenditures. If that were true, counterfeiting would be legal and Zimbabwe would be like heaven.”

    1. Note I said nothing about whether a helicopter money policy is the correct one, just that policy is likely to be evolving in that direction. As investors, we need to know where policy is going and position ourselves accordingly.

      Then you can form your own opinion in your own time.

    2. The mises.org article argues that there is never a shortage of demand, only a shortage of supply, because people are inherently greedy. I would argue that there is seldom a shortage of ‘wants’ but they only turn into ‘demand’ if one has the money to transform the ‘want’ into a ‘purchase’.

      You could flip the argument on its head and say that supply is only short because people are greedy and create barriers to entry (degrees, operating licenses, apprenticeships, permits, etc.) so as to increase the ‘value’ of what they provide.

      My field of science (ecology) suffers from the mythical belief that ideas have no value unless they can be expressed as a theory which can be represented by a model. These models are usually equilibrium-based and then the theoreticians wonder why the non-equilibrium world doesn’t behave the way it ‘should’. I get the distinct impression that economics suffers from the same malaise.

      I tend to be more of an empiricist; we won ‘t know for certain what a helicopter drop produces until someone tries it, and the outcome likely depends on the starting conditions which are never identical so the experiment can never be truly repeated.

  2. I find the above comment rude and presumptive. I’m here for Cam’s non-technical and technical analysis. Feel free to skip the posts you don’t like.

  3. I slightly differ from the previous post as economic analysis is interesting no matter the view point. The keynesian view may have its flaws but it is where our dear central bankers are taking us ! So better analyse it in depth….as far as Europe goes, helicopter money is illegal and Germany will do its best to stop it from happening. That said, many central bank tools were thought impossible just a few years ago so it could just be a matter of time…give it a few years and it may happen. In Japan, however, i think the tools the BOJ has put in place on Jan 29th when they implemented negative rates can exactly lead to that: helicopter money. I fully expect them to go that way within 1 or 2 years…

  4. Central Bank policy is a key driver of financial markets. To fight ‘confirmation bias’ I try to read articles that disagree with my thinking. I’m not saying that I agree or not with Cam’s economic analysis but it never is superficial or a waste of my time.

    The next few years as Central Bankers unwind the grand experiment of new monetary policies could prove to be chaotic or fruitful but since it is uncharted waters, we need smart folks to read the map. I am tempted to throw up my hands in frustration at contemplating the equivalent of monks debating how many angels are on the head of a pin, but I am shepherding the hard earned wealth of my clients and hence must travel onward. I have come to the conclusion that we won’t be returning to a previous ‘norm’ where old ideas hold sway. So keep this stuff coming at me, Cam.

  5. Cam never has offered pure technical analysis, so asking him to stick to that would amount to asking Cam to stop being Cam, and I for one wouldn’t like that.

    My main response to this post is to ask about the investment implications of helicopter money. It would be good to think about that in advance so I have a plan ready for when I hear the chopper blades coming, be they from Brussels, Tokyo, or Washington!

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