What is helicopter money? (Part I)

Fri 31 May 2019

By Brian Dennehy

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Helicopter money is coming – some might call it Modern Monetary Theory or “QE for the people”, but the effect is the same. This is a very significant change which will have a huge impact for years to come. Here we explain the background. For those in the UK over age 40 it is more familiar than you might think (see Part II).

[This is an update of our original series looking at helicopter money from 2016.]
Helicopter money is coming – some might call it Modern Monetary Theory or “QE for the people”, but the effect is the same.  This is a very significant change which will have a huge impact for years to come.  Here we explain the background.  For those in the UK over age 40 it is more familiar than you might think (see Part II).
This is Part 1, the background.  If you are bored already (!?), click here to go to Part II.
The Second World War was obviously tragic, but it laid the foundation for decades of economic growth.  First the rebuilding, then the rise of a young population, the baby boomers, whose spending habits would drive economic growth for a few decades.
Then in the 1970s, reforms of the banking system sharply increased the availability of credit – the debt bubble began to inflate.
There were hiccups along the way, but over the next 30 years a lot of money was made – by businesses, by investors, and by homeowners.
The beauty of demographic trends is that they give you a good feel for what lies ahead, for decades e.g. young people will tend to spend more, older people will tend to spend less; younger people are comfortable taking on debt, older people aren’t.
This began to break down in Japan around 1990 – the average age of their population reached a key turning point. From then there weren’t enough people to take on the debt to keep the economy motoring along in the way to which they had become accustomed. Economic growth began to stagnate.  But the government kept growing its debt pile.  At a time when profits, earnings and tax receipts came under pressure, debt was still increasing.  The only way for the interest to continue being paid on this growing debt pile was to keep interest rates low – and then get them lower still.  
Looking globally, in 2010 we said:
“Politicians and electorates of developed nations had broadly been in harmony for 30 odd years. An aura of prosperity was created. Consumers took on more debt, a culture of “buy today, pay tomorrow” took a hold; similarly governments took on more debt knowing that tomorrow’s growing and increasingly prosperous population could meet the bill. That is until the population stopped growing, and individuals weren’t so prosperous (TFG 18th edition, July 2010)
From around the year 2000 the demographics also turned negative in most of the developed world (UK, US, continental Europe).  The baby boomers were greying and increasingly (financially) conservative, but the debt bubble kept inflating – government debt, company debt, consumer debt, and mortgage debt.
Low and falling interest rates provided the fuel for a series of bubbles – such as technology in 2000, and property in 2007/8.  Something had to give and the result was a banking crisis in 2008/9 which brought the global economy to its knees.
Because it was a banking crisis the immediate solution (to prevent Great Depression II) was directed at shoring up the banking system in its broadest sense – which is why you and I, as taxpayers, continue to own a stake in the rescued RBS.  
But a funny thing happened.  Once the crisis was over you might think that Governments, with a little nudging from the central banks, would have then begun to address the problem which had been growing for many years – a still inflating debt bubble, which, in the case of government debt, was supporting an unsustainable State structure – Western democracies were living beyond their means, day after day.  But they didn’t.  Debt is now higher around the globe than in 2008. Hmmm.
Instead Governments stood to one side and continued to allow unelected central banks to make the calls.  So we now live in a crazy world with negative interest rates on many bonds around the globe (which means investors are guaranteed to make a loss if held to maturity), and there have even been instances of negative interest rates on bank loans – see here for the case of the Swedish sex therapist. In recent months negative interest rates have spread from “safe” government bonds to (very cyclical, and riskier) mortgage bonds.
Back in 2016 I said “You can be very sure that central bankers around the world have been telling their political masters “this cannot go on”.” – now I am not so sure.
And a few years before that…
“There is a race with the bureaucrats and politicians on one side, and voters and taxpayers and investors on the other. A relatively benign outcome requires that the patience of the latter holds out while the clumsy decision-making of the former clunk towards a solution”
Well, the voters won the race, expressing their discontent via the Brexit vote, Trump’s election, and populism across Europe. 
Very low interest rates hurt ordinary people, with no returns on their savings and shockingly low pension income from annuities.  Interest payments on debt are like oxygen being sucked out of an economy, and less confident businesses are less inclined to be over-generous with wages – we have shown this in charts on many occasions (see here).
In contrast, the action by central banks continued to buoy investment markets, and encourage financial engineering, which made the already wealthy even more wealthy.  This has not gone unnoticed by voters and taxpayers around the globe, as revolting voters have highlighted.
“Now Governments really are going to have to engage with this problem of too much debt and the resultant anaemic growth” I thought in 2016.
They aren’t doing so yet, but let me return to that in part 2, and particularly in part 3 which is more focussed on the current big debating topic, Modern Monetary Theory, coming to a general election near you, possibly quite soon.
Click here to read part II of "What is helicpoter money?"
For the history, read our original research from 2016 here.


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