After more than 600 interest-rate cuts and $12 trillion of asset purchases failed to move the inflation needle enough, central banks may need to head even deeper into uncharted territory.
The way to get the world out of its disinflationary rut could lie in them directly financing government stimulus -- a strategy known as deploying “helicopter money” after a 1969 proposal from Nobel laureate Milton Friedman.
Economists at Citigroup Inc., HSBC Holdings Plc and Commerzbank AG all published reports to investors on the topic in the past two weeks, while hedge fund titan Ray Dalio sees potential in the idea. European Central Bank officials are already squabbling about what President Mario Draghi calls a “very interesting concept.”
“We don’t know for certain that ‘helicopter money’ will be the next attempted silver bullet, however the topic is receiving considerably more attention,” said Gabriel Stein, an economist at Oxford Economics Ltd. in London. “The likelihood is reasonably high of some form being implemented somewhere.”
The theory -- never attempted by a modern major economy -- is to fuse monetary and fiscal policies now both running out of room. Cash-strapped governments sell short-term debt straight to their central bank for newly printed money that is then injected straight into the economy via tax cuts or spending programs. The usual intermediaries, like banks, are bypassed.
The idea is to spur spending and investment directly rather than influence bond yields or sentiment. Central banks can be saved from permanently underwriting governments by establishing growth or inflation limits.
In a 2002 speech that earned him the nickname “Helicopter Ben,” then-Federal Reserve Governor Ben S. Bernanke said taking to the skies would “almost certainly be an effective stimulant to consumption and hence to prices.”
Reviving the debate is the failure of inflation to accelerate in much of the world despite Bank of America Corp.’s calculation that as of early February central banks had cut rates 637 times and spent $12.3 trillion on assets since the financial crisis in 2008. It also estimated 489 million people now live in countries where rates are negative.
To Dalio, the founder of $154 billion Bridgewater Associates, that means the next step should be to do even more to spark demand.