Helicopter Money to Increase Short-Term Inflation 2020?

COVID-19 continues to show its ugly face and leave a trail in its stead. Due to the economic impact that it has had and continues to have, governments have started to take extreme measures. One of which is Helicopter Money.

Below we will look at what helicopter money is, and what that means going forward. We will also do a shallow dive into what monetary and fiscal policy are and how they are connected with helicopter money.

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Monetary and Fiscal Policy

Governments have two tools at their disposal when it comes to impacting the economy. One way is to change interest rates and alter the money supply, monetary policy. The other involves the government changing tax rates and levels of government spending, fiscal policy.

Fiscal Policy

Fiscal policy can either lead to expansion or contraction. If governments want the economy to expand, they can either lower taxes or increase their spending. Expansionary fiscal policy is often characterized by deficit spending. This means government spending exceeds receipts from taxes and other sources. Expansionary fiscal policy is what is used when a country is experiencing a recession.

However, if inflation is running really high and the economy is expanding too fast, governments can implement contractionary policies. This is done by increasing taxes, which decreases the amount of money consumers have to spend and decreases government spending. This type of fiscal policy is characterized by a budget surplus. This tactic is rarely used. If economic expansion is happening too rapidly, governments prefer to use monetary policy.

Monetary Policy

Monetary policy consists of management of money supply and interest rates, with the goal of controlling inflation, consumption, growth, and liquidity. There are several ways that this can be accomplished; interest rates can be modified, government bonds can be bought or sold, foreign exchange rate regulation, and changing the amount of money banks are required to have as reserves. In Canada, monetary policy is controlled by the Bank of Canada (BoC).

During times of recession or high unemployment, expansionary monetary policy is used. What often happens is interest rates are lowered which promotes spending and makes saving unfavorable. This ultimately leads to an increase in the money supply and makes business expansion more accessible. This has been the case since 2008 with low or near-zero interest rates.

Increased money supply can lead to higher inflation. When inflation exceeds acceptable levels, contractionary monetary policy is implemented. This is done by increasing interest and slowing the growth of the money supply. This will usually slow economic growth and increase unemployment.

In essence, inflation and interest rates have a reciprocal relationship.

What is Helicopter Money?

The basic premise of helicopter money is to print large sums of money and distribute it to the public in hopes of stimulating the economy. This is a type of expansionary monetary policy that is often seen as a last resort. Many would contest that, even though theoretically feasible, helicopter money from a practical standpoint, is highly improbable.

However, we are already seeing helicopter drops being implemented to deal with the current COVID-19 pandemic. In Canada, this has come as a ~$200 Billion stimulus package.

This package includes wage subsidies, government backed credit lines, and more tax deferrals. In addition, it was announced that “employees inside and outside the unemployment insurance system and the self-employed can apply to receive $2,000 each month for four months”. To receive this you must prove that you are without work each month.

Inconsistencies and Issues with Helicopter Money

There are several inconsistencies or issues with helicopter money which we would like to touch on; How it is supposed to be reserved for deflationary times, and the potential increased short-term inflation in the wrong parts of the economy.

Deflationary Times

Earlier we talked about how expansionary monetary policy is supposed to be used during a recession or deflationary times. Well, if you have been following us for a while you know that we believe that inflation is higher than what is quoted:

Inflation is Higher Than You Think

Inflation: The Thief of Your Future

Are the Posted Inflation Rates a Lie?

For a helpful resource to see what inflation would be if it was calculated the same as it used to be, visit http://www.shadowstats.com/inflation_calculator.

We also mentioned earlier that expansionary monetary policy has the effect of driving up inflation. So if inflation is already higher than what we are told, and it goes up, even more, it will mean one of two things. Either consumer’s purchasing power will be diminished faster than it already is, or, the government will have to roll out more stimulus to maintain the current level. This brings us to our second point.

Short-Term Inflation in The Wrong Parts of The Economy

Due to the current pandemic, the economic situation we could soon find ourselves facing is unprecedented. This season of economic recession is different from most others. We are seeing supply lines cut off, stores being closed everywhere, and whole cities being essentially shut down. People claiming unemployment has sky-rocketed, meaning the amount they can spend and consumed is going to continue to see massive declines. This is already on top of the fact that most Canadians are $200 away from insolvency every month.

That is where this $2,000 a month comes in to play. However, since we are in a pandemic, that money is going to be spent on necessities. So what items and services are going to increase the most in cost? You got it, necessities! This is already in a time when some grocery stores are jacking up the prices of paper gold (toilet paper) as if they are real gold.

These necesities (whether goods or services) are also what have seen the most inflation in recent years. It not computers/tech, or appliances. It is your groceries, housing, vehicles… The things you really need.

The implementation of helicopter money may only serve to amplify the amount of inflation we see on these things.

Conclusion

Helicopter money is a great way to get dollars to the grassroots participants in the economy who will use it, unlike handing another bailout to corporate America that doesn’t deserve it.

Although helicopter money seems like a good idea on the surface, it may only serve to make a bad situation worse. Since people are in need of necessities, and discretionary spending will most likely continue to decrease, we could see inflation in the wrong parts of the economy.

What we really need is a way for average citizens to get back to work and create output. Helicopter money does fill the gaps so we can pay our bills in the short term, but for a lot of us, it won’t be getting back us back to work until this virus passes.

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