S Eric Lonergan Precisely Defines Helicopter Money

Eric Lonergan is an economist, hedge fund manager and writer. According to his bio, he has written for Foreign Affairs, the Economist and the FT. He has contributed advice to governments.

He first proposed the concept of transferring money to households by proactive monetary policy in 2002. He is not the father of helicopter money (Milton Friedman is), but he is a significant messenger of helicopter money for the modern era. He is the foremost economist when it comes to defining Helicopter Money.

The helicopter money (HM) debate that he started was based on the concept made famous by Milton Friedman. Whatever you think about Friedman, or about neoliberalism, or about monetarism in general, put that all aside. HM is different and better and more fair, and could at least slow the divide between rich and poor.

Helicopter money has been called QE for the people but that is not quite right. I will list some important points I have found from reading Lonergan regarding this subject. Turns out, HM is the opposite of QE. It has been called QE for the people, but is quite superior to QE.

It is important to understand that some in central banking appear to be in love with the concepts of negative interest rates and breaking the zero lower bound with nominal rates. If that is the case, then helicopter money, though a far better idea, will never be implemented.

This would be a big mistake for monetary policy. I hope this love affair with negative is not a sinister plan on the part of some in central banking. If it is sinister, we will have to all shout louder in our commitment to helicopter money, but understand clearly what it is and what it does. Here are ten helpful and important points that define HM for the reader:

Father of Helicopter Money Milton Friedman

1. I checked with Mr Lonergan prior to writing this article, and he has confirmed that HM does not involve the issuance of treasury bonds as collateral. Former Fed president Narayana Kocherlakota always speaks of treasury bonds being issued for the purpose of spreading HM. But according to Lonergan, Kocherlakota is simply not correct in his analysis of what HM is. This is not to say there are laws that need to be changed from nation to nation to make this process work. But the issuance of treasury bonds is just QE again, but for the people. Helicopter money is much more powerful than QE! It is an alternative to QE.

2. While helicopter money is either a one off or short duration expansion,  it is a permanent expansion, of central bank base money. But we should not be confused about this. While the expansion of the money supply is permanent and the base money continues to circulate, the actual funding of families is either one off or for a short duration. Lonergan has called for 12 to 18 months, until the goals of the central bank are reached.

3. It is, after all, the answer to the zero lower bound, to deflation. Because it is a volatile policy if not done correctly, it should be used to get the economy off the mat and only during those times. It is a better plan than negative rates or a cashless society.

4. However, other economists believe that the actual money transfers, not just the circulation of transferred money, should be permanent in themselves. Lonergan opposes this, not being a big fan of market monetarist rational expectations. He believes central bank goals could be reached by a limited transfer, again, no more than 18 months in duration. MM's believe that people may not spend the money if they know the duration is short. Lonergan believes enough would be spent to accomplish the goal. 

5. Helicopter money cannot be a loan, unless it is a loan in perpetuity, which is legal in the Eurozone.

6. Helicopter money is not a tax cut, although it could, in my opinion, be made more palatable being couched in the language of a tax rebate. But it is not a tax cut, which would make government funding diminish, which would hurt GDP. There is simply no need for tax cuts with this plan. He takes issue with Bernanke on this tax rebate issue and on a few other issues. Bernanke, then, appears to not grasp the difference between QE and helicopter money, any more than Kocherlakota seems to understand the concept.

7. Helicopter money, for Lonergan, is a straight up gift to the people in equal measure, with one person not gaining an advantage in the size of the transfer, over another person.

8. HM should not be taxed, because it is base money and is not a fiscal plan, but rather a monetary plan.

9. Monetarism is not dead, but QE is comatose at the zero lower bound. HM breathes new life into monetarism.

10. There are differing views about Helicopter Money and how it should be applied, by the economists who promote the idea, but all who understand it know that it requires the use of base money. There are links below to show the variety of ideas among those who have discussed the subject.

We can be certain that if two Fed presidents are unable to comprehend a fairly simple concept of helicopter money, that they may simply have a more sinister plan, and may have fallen in love with using the zero lower bound to impose future represive goals. There is simply no excuse for this, with the wonderful tool of helicopter money as a way for monetary policy to be implemented in a successful way.

For further reading:

Nick Rowe, Willem Buiter*, Paul de Grauwe and Simon Wren-Lewis

(These are the economists who agree with Lonergan that base money is not a debt)

QE For the People

(Lonergan's helicopter money articles on his blog)

Pros and Cons of Helicopter Money-Bernanke Misunderstood

Federal Reserve Mandates Slow Growth. So Fed Must Finance American Infrastructure

Central Banker ProCyclical Craziness

China Could Be the Next Basel Victim or Not 

Larry Summers 100 Dollar Bill Ban and Westfalia Lost

Clearing Up Negative Interest Rate Confusion. Kocherlakota Weighs In

*Buiter, some will remember, has also called for a cashless society. That cashless concept, an attack on main street, would be rendered completely unnecessary if helicopter money were implemented. 

Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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