Written by Hudson Adviser Michal Park
With inflation still below the 2-3% target band (core inflation just 1.3% over the year – the weakest reading since the series began in 2003), the cash rate looking likely to be cut twice this year (as early as next week and up to four times according to some economists), and the Australian economy in what can only be called dire straights, the term ‘helicopter money’ is being bandied around for the first time since former Federal Reserve Chairman Ben Bernanke alluded to it in 2002.
The term Helicopter Money conjures up images of cash being showered onto households from above – and that’s not far from the truth. It is essentially the production of money by the central bank to handout directly to households in an effort to boost disposable incomes and spending. In fact, our government did exactly this back in 2009, handing out one off payments of $900 to Australian’s earning less than $100K per annum, and $950 in back to school bonus’ aimed at helping families with school aged children. The caveat was for those in receipt of these payments to spend the money on locally-owned businesses to protect the country from recession. Well, history will show that we did indeed avoid a recession, but how much of that success can be attributed to the cash splash?
The term ‘Helicopter Money’ was coined by Nobel economics prize laureate and free-market advocate Milton Friedman in the late 1960’s, and it seems it is being considered as a viable option for the Reserve Bank of Australia in the current climate – that is, to drive up inflation and the stimulate the stagnating economy.
The risk, of course, in giving households handouts is that they will simply save the cash instead of spending it which defeats the purpose entirely. Another major risk is the potential for uncontrolled inflation – but inflation (or lack thereof) is one of the precise reasons why the RBA should/would consider this strategy.
The point is that the RBA may have to be creative if interest rate cuts aren’t enough. With the current cash rate standing at 1.50%, there really isn’t a lot of monetary policy wriggle room before we hit negative interest rate territory. So alternative choices to help kick start the economy may just include a little helicopter money.