Definition
“Helicopter Drop” , also known as “Helicopter Money” , is a reference to an economic policy that involves printing large quantities of money and distributing it to the public. The term was coined by the American economist, Milton Friedman, who likened the process to throwing money from a helicopter. It’s typically used in extreme cases to stimulate economic growth during dire economic downturns such as recessions or depressions.
Phonetic
Helicopter Drop: /ˈhɛlɪˌkɒptər drɒp/Helicopter Money: /ˈhɛlɪˌkɒptər ˈmʌni/
Key Takeaways
<ol><li>Helicopter Drop (Helicopter Money) is a theoretical and unconventional tool of monetary policy that involves providing large sums of money to the public with the aim to stimulate the economy. It’s referred to as ‘helicopter money’ because of the idea of dropping money from a helicopter for the people to spend.</li><li>The concept was first proposed by renowned economist Milton Friedman in 1969. It is often regarded as a last-resort measure to combat severe economic downturns or deflation, when other monetary and fiscal measures have failed to spur economic growth.</li><li>While Helicopter Money has the potential of counteracting deflation and boosting economic activity by spurring consumption, it carries potential risks of prompting hyperinflation, causing currency devaluation, and promoting reckless fiscal behavior by the government.</li></ol>
Importance
The term “Helicopter Drop” or “Helicopter Money” is an important concept in business and finance because it represents an unconventional monetary policy tool used by authorities to stimulate economic growth, especially during a recession or deflation. The term, coined by economist Milton Friedman, literally refers to the act of dropping money from a helicopter, metaphorically indicating an indiscriminate distribution of money directly to individuals or businesses with the expectation they will spend it thus spurring demand and inflation. Some central banks may resort to this tool when traditional monetary policies, such as lowering interest rates, have proven ineffective. It’s subject to debate about its efficacy and potential to cause hyperinflation if misused.
Explanation
Helicopter Drop, also known as Helicopter Money, is a financial strategy generally used in periods of economic distress or potential economic downturn. The purpose of this strategy is to stimulate economic activity by directly injecting a substantial amount of money into the economy, hence why the term “Helicopter Drop” is employed. This keynesian approach is designed to spur inflation and increase consumer spending, particularly when conventional monetary policy tools such as cutting interest rates or increasing government spending prove to be ineffective.In terms of application, Helicopter Money is typically directed towards the general public rather than financial institutions. This direct approach is designed to increase consumer spending which in turn should stimulate growth and help avoid, or counteract, economically challenging periods. The distribution of such funds can take multiple forms such as tax rebates, digital deposits, or even physical cash. Despite being a controversial policy due to potential long-term issues like hyperinflation, it is seen as a measure of last resort to combat extreme economic circumstances.
Examples
1. Quantitative Easing in the United States (2008-2014): Following the financial crisis in 2008, the United States Federal Reserve implemented several rounds of quantitative easing – a form of monetary policy where a central bank buys government bonds or other financial assets to inject money into the economy. While it’s not a direct helicopter drop since the money went to banks first, it was essentially a tool designed to flood the financial system with new money, much like what helicopter money aims to achieve. 2. Economic Impact Payments in the United States (2020-2021): More direct examples include the stimulus checks distributed to American citizens during the COVID-19 pandemic. These direct payments effectively put money into the hands of individuals, acting like helicopter money to stimulate the economy.3. ‘Abenomics’ in Japan (2013 onwards): One of the pillars of Abenomics, the economic policy of Japan’s Prime Minister Shinzo Abe, was extensive monetary easing. The Bank of Japan pumped money into the economy by buying long-term government bonds and other assets. This was a form of financial stimulus akin to a helicopter drop, aimed at ending years of economic stagnation and deflation. However, while it boosted inflation initially, the long-term effectiveness has been debated. Remember that the term ‘helicopter drop’ is often used as a metaphor for unconventional methods of stimulating the economy during periods of slow economic activity or recession. Its essence is about making new money available to promote spending and economic growth.
Frequently Asked Questions(FAQ)
What is Helicopter Drop or Helicopter Money?
Helicopter drop, also known as Helicopter Money, is a theoretical and unorthodox tool of monetary economics policy that involves providing large sums of money to the public to stimulate the economy. It was coined by renown economist Milton Friedman in 1969.
How does Helicopter Money Work?
In this economic strategy, a central bank or government would produce a large amount of money and distribute it to the public. The idea is that the increased spending by the public would stimulate the economy and combat deflationary spirals.
Has a Helicopter Drop ever been implemented?
No country has ever implemented a pure form of a helicopter drop, but similar strategies have been used. Notably, during the 2020 COVID-19 pandemic, many countries issued large direct cash payments to citizens.
What are the risks of Helicopter Money?
If implemented incorrectly, helicopter money could lead to severe inflation or hyperinflation. There is also a risk that it could undermine the independence and credibility of central banks.
Is Helicopter Money related to Quantitative Easing?
Helicopter Money is often compared to Quantitative Easing (QE) as they are both unconventional monetary policy tools. While they have some similarities, they are different. QE injects money into the economy indirectly by buying government or other financial securities to lower interest rates and boost investment, while Helicopter Money directly provides the public with new cash.
Can Helicopter Money reduce inequality?
In theory, since all individuals receive the same amount of helicopter money, it could potentially reduce income inequality temporarily. However, in practice, it might be more complex and the overall impact on inequality would depend on many factors.
How is Helicopter Money financed?
It involves the central bank creating new money, in other words, increasing the monetary base. This is different from typical government spending which is usually financed through taxation or borrowing.
Related Finance Terms
- Monetary Easing
- Quantitative Easing
- Fiscal Stimulus
- Central Banks
- Inflation
Sources for More Information
