Fed President Loretta Mester – Next Step in Monetary Policy Is Helicopter Money
The President of the Federal Reserve Bank of Cleveland, Loretta Mester, recently joined a parade of Fed officials who have endorsed the concept of “helicopter money” as a possible solution to the prospect of a severe economic downturn worldwide. ABC.net reported that Mester, speaking in Australia before the Federal Open Market Committee (FOMC), opened the doors to a quantitative easing, which pundits have called “helicopter money,” as a metaphor that compares the financial approach to throwing millions of dollars out a helicopter for people to pick up off the street.
Global Economic Concerns Convince Monetary Policymakers to Spread Cash in Helicopter-Style Drops
Japan plans to throw about 10 trillion yen, or $130 billion, into stimulus programs to give traction to efforts to relieve its economic troubles, and other countries are likely to use “found” money to dig their way out of worsening economic conditions in the global markets. Mester told ABC news, “In the U.S., we’ve done quantitative easing, and I think that’s proven to be useful.” The ancient Romans called this kind of policy “bread and circuses,” which the government used to distract people from economic and political problems.
Helicopter money is most accurately defined as a government providing direct benefits to businesses and its citizens without going through banks and other interlocutors. Of course, nobody’s going to load up a helicopter with cash and start throwing money, but Investopedia.com defines this unconventional policy as the brainchild of economist Milton Friedman. In 2002, Friedman defined deflation as the result of a drop in demand for goods and services and recommended providing stimulus money as a way to increase GNP demand and get the economy rolling. Bernanke managed to use quantitative easing effectively in dealing with the recession in 2008 and 2009. However, some critics still feel that the stimulus program contributed to today’s economic problems.
Helicopter “drops” differ from the efforts made in 2008 and 2009 that included multiple injections of trillions of dollars into the economy through quantitative easing because the Federal Reserve would have more direct control of who gets the money and how it’s used. Instead of purchasing mortgages and bonds through third-parties, the Reserve could exercise even greater power by purchasing bonds directly, printing money and transferring it to government accounts.
Dangerous Indications of a Severe Economic Downturn
The signs of a dangerous economic collapse worldwide continue to multiply. The Federal Reserve worries about the long-term consequences of Britain–and maybe other countries–leaving the EU. The list of worrisome economic indicators includes:
- Out-of-control defense spending and health insurance subsidies
- Failure to fix Social Security and Medicare
- Global repercussions of Brexit, or Britain’s decision to leave the European Union
- Default rates for junk bonds that hit a 6-year high in June of 2016 at 4.9 percent
- Energy company default rates of 29 percent for exploration and overall defaults on $28.8 billion of debt
- Inability of the Fed to raise short-term interest rates due to a flattening curve in yields between 10-year and 2-year Treasury bonds
- Stagnating economies that still exist in many areas of the world
- Exit of higher earning Baby Boomers from the labor market
- Costs of servicing more than $19 trillion in national debt of the United States as of 2016
- Wasteful spending such as spending $294 billion on expired government programs according to a report in Forbes.com
- Portugal’s insolvent banks
Zoning-In on How Helicopter Money Might Be Used
Using helicopter money to buy bonds, goods and services directly in the real economy has been an economic taboo for more than 50 years, and it’s a tactic that’s usually only employed in the most extreme economic situations such as war or the Great Depression. However, former Federal Reserve chairman Bernanke and current chair Yellen won’t rule out using helicopter money depending on how economic conditions develop. Mester’s comments can be taken as indications that the Federal Reserve is considering the option more seriously in response to recent economic uncertainties. Chairman Yellen, according to a Money.CNN.com report, affirms that the Fed has no plans to use helicopter money anytime soon because it could stimulate hyperinflation, but the government will certainly be paying attention to Japan’s use of helicopter money and the results that generates.
Opposition to Using Helicopter Money as Economic Policy
Many opponents of deficit spending and printing money without commensurate economic advances and policy shifts also abhor the idea of using helicopter money for the same reasons. The financial hits keep coming, however, and include everything from Brexit to China’s devaluation spree. Throw in a U.S. presidential election, and the stew becomes hopelessly trained economists. Learn more about the Fed’s position on helicopter money and the current economic climate by visiting the PersonalMoneyStore.com.