Will he or won't he?
The question applies to Mario Draghi, president of the European Central Bank. Will he fire up the ECB helicopter and drop bundles of euros hither and yon to stimulate the euro zone economy and stoke inflation? The Bundesbank – the German central bank – and Germans in general hate the very idea, which means it can't be all bad.
It's a sentiment they better get used to, because the helicopter drops have gone from unthinkable to somewhere between possible and likely, not just in Europe, but also in Japan. And in spite of what the enraged Germans think, freebie euros landing in personal bank accounts could do the trick.
More than a few economists and strategists are convinced that helicopter money is coming. "Investors are making a huge mistake in thinking that central banks are out of bullets," Peter Berezin, managing editor of Montreal's BCA Research, said in a May 13 note. "Helicopter money is coming and, once deployed, the policy will prove to be much more successful than most people imagine."
Germany had a collective anxiety attack in March, when Mr. Draghi, when asked about helicopter money, did not specifically rule it out. "It's a very interesting concept that is now being discussed by academic economists and in various environments," he said.
A month later, he insisted the idea had never been discussed in the hallowed halls of the ECB's headquarters in Frankfurt, which is still not the same as ruling it out. As he lies propped up in bed at night, contemplating his miserable little realm, where interest rates are negative, deflation an ever-present danger and unemployment still north of 10 per cent, why wouldn't he consider it?
Helicopter money would be completely in character, for Mr. Draghi has morphed from mild-mannered central banker to the central banker who rocks. When he landed at the ECB in 2011, just as the euro zone seemed bent on self-immolation, the stimulus efforts he would later launch seemed unthinkable at the time.
They would include the pledge to buy unlimited amounts of the sovereign bonds of any euro zone country having trouble financing itself (known as outright monetary transactions) to quantitative easing (QE), a program now worth €1.7-trillion and counting. They have worked to varying degrees, in the sense they probably prevented economic collapse and kept the euro zone intact, though far from thriving even if growth is now picking up. Why not complete the repair job with helicopter money?
The term was invented by American economist Milton Friedman in 1969, when he conjured up the image of central banks milling out banknotes and having them scattered from the sky, to be picked up and spent by consumers, boosting demand. In reality, anyone with a bank account would receive an electronic credit – money for nothing and no new debt would be created.
If the ECB or the Bank of Japan unleash the helicopters, the goal would be deflation-busting. Deflation is bad news for any economy. Disinflation (the slowing rate of price increases) or deflation (outright falling prices) means governments and households can't inflate their debt burdens away, and the euro zone countries are generally soaked in debt. Falling prices can cripple an economy because an item or service offered today will only become cheaper tomorrow, so everyone stops buying and investing.
To be sure, not all the free money would be spent. But a lot would. Demand would rise, theoretically lifting prices, employment and wages. The currency would weaken as the money supply increased, boosting exports (much to the ECB's delight, QE has pushed down the euro). It worked in Japan in the 1930s.
So what's not to like? A lot if you're a German central banker. Germany is convinced that the rising supply of cheap or free money will create bubbles and may have already created a housing bubble. It thinks that helicopter money and all of Mr. Draghi's other unconventional stimulus measures amount to kicking the can down the road, encouraging governments and corporations to delay reforms that would make them more efficient and productive. Germany also fears that if the skies are thick with helicopters, the stimulus could trigger runaway inflation.
Germany would also argue that the stimulus measures in place (most of which it didn't want) are just starting to work their magic. The euro is weak, bond yields have collapsed and cheap oil is putting more money in consumers' pockets. Indeed, the euro zone's first-quarter annualized growth, at 2.2 per cent, was faster than either the British or the American rate.
The trouble with the German view is that inflation is still nowhere near the 2-per-cent target rate in the euro zone. Mr. Berezin, of BCA, notes that the tailwind effects of cheap oil, low yields and a weak euro can't last forever and, once they fade away, the deflationary pressures will come roaring back. That's why he and others think the helicopter pilots are about to hit the start button.
Why should you care in Canada? Because a strong euro zone is good for international trade. A return to moderate inflation would also help the European stock markets, especially the banks. Gold, too, would benefit from inflation and the Canadian bourses are stuffed with gold companies.
Eric Reguly