Drone money: Staged an impressive comeback - Nomura

Bilal Hafeez, Research Analyst at Nomura, suggests that the term Helicopter money (Drone money) may have lay dormant for years, but this year it has staged an impressive comeback.

Key Quotes

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us further suppose that everyone is convinced that this is a unique event that will never be repeated.” (The Optimum Quantity of Money, Milton Friedman, 1969)

And thus “helicopter money” entered the lexicon of economists. The term may have lay dormant for years, but this year it has staged an impressive comeback. Not wanting to be too picky, but I’d prefer the term “drone money” to bring the concept into the twenty-first century. After all, there are now around one million drones, compared with only 60,000 helicopters in the world.

The recent flurry of interest in “drone money” is that because of the current mix of negative rates and quantitative easing any monetary expansion is either remaining in the banking system or spilling over into asset markets, rather than the real economy. A central bank-financed fiscal expansion or even a direct central bank cash injection to the public would circumvent this by placing the monetary expansion in the real economy.

Both Japan and the euro area are much talked about in this context given their weak growth since the financial crisis – only recently have their economies returned to the size they were in 2007 (in real terms). If we look at the breakdown of contributors to growth since 2007, we find that the euro area has seen a 20% expansion in government spending compared with 1% overall economic growth, while Japan has seen an 8% expansion compared with 1% overall economic growth. The problem with both the euro area and Japan has been the large declines in private investment. Therefore, any “drone money” should not necessarily be tied to government spending, which many are focusing on, but rather to private investment.

The US has staged a more impressive recovery with overall economic growth 10% since 2007 (in real terms). Private consumption has grown faster at 12% and private investment has grown slightly less fast at 8%. The drag, though, has been (local and federal) government spending, which actually contracted 2%. Austerity really has bitten the US. Whether “drone money” will materialise is another question.”