Equities | Monetary Policy & Inflation | US
Summary
Two economists have proposed a scheme where the Fed would inject money directly to households, a form of helicopter money
This would be more supportive of the real economy and less supportive of markets than QE
Because the Fed has nearly exhausted its ammunition, helicopter money is likely to be introduced at the next economic shock
Helicopter money would be a complement rather than a substitute to QE because the Fed strongly believes that strong financial markets are good for the economy
Market Implications
Positive equity and risk assets as helicopter money is a new form of monetary policy ammunition
Negative dollar as the Fed would be the first global central bank to move to helicopter money
Fed Money for All
Pandemic payments and other forms of government support are playing a crucial role in the US recovery. But getting these payments to the public has been a challenge, both logistically (25% of Americans are underbanked) and politically. Congress’ inability agree on another round of support has lowered the risk of a V-shaped recovery (Can the Recovery Continue Without New Relief?, 24 September 2020).
Two economists, Julia Coronado and Simon Potter, have recently proposed a solution. To overcome these hurdles, provide each American with an account at the Fed that the Treasury would replenish as needed to stabilize the economy, a form of helicopter money (hereafter ‘helimoney’).
Helimoney would solve the issue of the underbanked population by providing each American above 16 years of age with an account held at digital payment providers (DPPs) and 100% backed by Fed reserves (hereafter ‘heliaccounts’).
Finally, the proposal makes the coordination between monetary and fiscal policy explicit because the Fed would automatically fund the transfers to households by buying the ‘helibonds’ issued by the Treasury.
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Summary
- Two economists have proposed a scheme where the Fed would inject money directly to households, a form of helicopter money
- This would be more supportive of the real economy and less supportive of markets than QE
- Because the Fed has nearly exhausted its ammunition, helicopter money is likely to be introduced at the next economic shock
- Helicopter money would be a complement rather than a substitute to QE because the Fed strongly believes that strong financial markets are good for the economy
Market Implications
- Medium-term; Positive; US equity and risk assets – helicopter money is a new form of monetary policy ammunition
- Medium-term; Negative; US dollar – the Fed would be the first global central bank to move to helicopter money
Fed Money for All
Pandemic payments and other forms of government support are playing a crucial role in the US recovery. But getting these payments to the public has been a challenge, both logistically (25% of Americans are underbanked) and politically. Congress’ inability agree on another round of support has lowered the risk of a V-shaped recovery (Can the Recovery Continue Without New Relief?, 24 September 2020).
Two economists, Julia Coronado and Simon Potter, have recently proposed a solution. To overcome these hurdles, provide each American with an account at the Fed that the Treasury would replenish as needed to stabilize the economy, a form of helicopter money (hereafter ‘helimoney’).
Helimoney would solve the issue of the underbanked population by providing each American above 16 years of age with an account held at digital payment providers (DPPs) and 100% backed by Fed reserves (hereafter ‘heliaccounts’).
Finally, the proposal makes the coordination between monetary and fiscal policy explicit because the Fed would automatically fund the transfers to households by buying the ‘helibonds’ issued by the Treasury.
Helimoney Is Neither a Growth nor Inflation Game Changer
Helimoney would allow for faster and more targeted fiscal policy. But in my view it is a game changer for neither growth nor inflation. First, the impact of transfers (or tax cuts for that matter) on growth or inflation depends on whether they are saved or spent rather than on whether they come through a cheque from the Treasury or an increase in deposits into heliaccounts.
Second, and perhaps more importantly for investors, helimoney alone is unlikely to move the economy to a high inflation regime from the current low one. That’s because the latter reflects mainly structural factors (see Three Conditions for a Lasting Inflation Acceleration, 16 July 2020).
Unlike QE, Helimoney Would Support the Real Economy More Than Markets
From the Fed’s perspective, helimoney attractive because it would support the economy much more and the markets much less than QE does. First, unlike QE, helimoney would not directly impact yields. Second, helimoney would not directly impact banks reserves since the Fed would fund its purchases of helibonds by effectively issuing reserves to the DPPs rather than to the banks. Third, helimoney would put money directly into households’ pockets. This is by contrast with QE, where Fed asset purchases need to impact wealth first, then demand for goods and services, then employment and wages, and only then the demand for goods and services and economic investments.
Helimoney Debut Likely at the Next Economic Shock
The Fed is running out of ammunition: the 10yr yield is now only 65bp above 0. And while the Fed insists that forward guidance and other forms of jawboning are powerful instruments, markets are unconvinced.
This suggests helimoney will probably debut at the next major economic shock, possibly by end-year if, for instance, the lack of new budget relief throws the recovery off course. As discussed above, however, helimoney would be much less supportive of markets than QE, which could see market valuations adjust down closer to economic fundamentals. In view of the current disconnect between fundamentals and valuations, it may well turn out that, with enough direct income support to households and small businesses, markets could adjust down with limited impact on the real economy.
The Fed is unlikely to experiment with financial asset price deflation, however. It strongly believes that a tightening of financial conditions would hurt the real economy. It does not see inflated asset values as a risk (or indeed asset values as inflated). Furthermore, the public and politicians would not take kindly to a Fed-induced financial asset price deflation, while the recent Fed Listens event suggest the Fed has become more sensitive to public opinion. Finally, the Fed itself would be exposed to financial asset price deflation through its credit facilities.
As a result, helimoney is more likely to debut as a complement than substitute to QE, and TINA seems likely to endure – for now. That said, the Fed would likely be the first global central bank to implement helimoney, which would add to the trend of dollar weakness and further support risk assets.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)