What is Helicopter Money and Quantitative Easing

Helicopter Money and Quantitative Easing (QE) are the two new phrases that are being repeatedly used in political and economic communities.

As we are aware, the entire world is battling the Covid-19 pandemic now. And taking measures to prevent the spread. One of those measures is the lockdown because of which a great deal of economic activity has been shut down in many parts of the world.

The world countries have two major issues that are intertwined with each other, one is the containment of the Covid-19 disease and revival of the economic activity. They have to be balanced against each other without which people are going to suffer immensely either by the disease or by poverty.

In order to spur the economic growth, there are two new activities that have been looked into by the world leaders and economists for the revival of the economy.

What is Helicopter Money?

Have you ever thought of money being printed and dropped from the sky?

Yes, this is exactly what helicopter money policy aims at doing. When a country employs this unconventional monetary policy, it prints large sums of money and distributes it to the people, thereby increasing public spending in hope of stimulating the economy when a recession occurs.

Milton Friedman, an American economist, coined this term. It is a metaphor denoting a helicopter dropping money like scattering supplies from the sky during the times of crisis.

No country has used this method until now. However, in 2016, Japan considered using this technique because of the slow growth rate. But, many individuals and institutions expressed their concern over the rise of inflation and devaluation of the currency. Hence, Japan withdrew this idea and implemented an alternative idea of inducing money supply to the market by purchasing government securities.

Advantages

• It increases the aggregate demand for goods and services immediately, thereby boosting the economy as money is directly given to the public.
• No burden of debts as governments are not borrowing money, but they are printing the money and distributing it.

Disadvantages

• It increases inflation as money is directly given to the public, and it may lead to hyper-inflation where the economy is further ruined instead of reviving.
• Devaluation of currency can take place in the foreign exchange market because of the availability of vast amounts of domestic currency due to printing and supplying.

What is Quantitative Easing (QE)?

Quantitative Easing is an unconventional monetary policy where central banks induce money supply into the market by purchasing long-term securities, usually bonds either from the Government or financial institutions (or banks).

It is aimed at the increase in money supply when the economic growth is either low or stagnated, thus favouring the lower interest rates. Increased money supply and low-interest rates make banks lend more. Consequently, individuals and businesses are able to borrow high amounts that in turn, increases the investment and expenditure, which boosts economic growth.

Advantages

• Some countries have tried to use this method, but no significant results were found.
• It is estimated that this will revive a low economic situation as it boosts the spending from Individuals and Businesses.

Disadvantages

• Inflation and devaluation are the disadvantages associated with this policy like the Helicopter money policy.

Use of Quantitative Easing across the world

Japan was the first country to use this technique in the 2000-2006 period. It failed in achieving targets despite the efforts made by Japan’s Central Bank.

In 2008, the US started implementing Quantitative Easing to come out from the 2008 financial crisis. It added around $ 2 trillion money into the markets marking the largest economic stimulus in history. Many believed that it helped in reviving the economy following the 2008 crisis, but nobody could determine the magnitude of the role it played in doing so.

Following the 2008 financial crisis, the Swiss National Bank also employed this technique, but it was unsure of the role played by Quantitative Easing in rallying the economy.

The European Central Bank Quantitative Easing program in the 2015-2018 period garnered mixed results.

In March 2020, the US Federal Reserve announced that $ 700 billion as a Quantitative Easing program to strengthen the economy that was debilitated due to the global pandemic COVID-19.