by Peter Spence, The Telegraph:
One of the wildest ideas to hit the US Presidential campaign trail might become a reality sooner than you would think.
Donald Trump, the Republican party’s nominee, has claimed that the US national debt, standing at more than $19 trillion (£13 trillion), does not need to be repaid.
“This is the United States government, you never have to default, because you print the money,” he declared live on air.
His comments signal his belief that America’s authorities, could, if they wanted, print enough money to pay back their creditors without raising an extra cent in taxes.
To many, Trump’s comments were startling. Yet, those familiar with the gyrations of central banks know that they contained more than a grain of truth.
The notion of helicopter money – having a central bank issue new money to pay for government spending – could also be used to finance the US deficit, and eventually, to fund a budget surplus that could pay down the national debt.
This idea – often associated with economic basket cases such as Venezuela and Zimbabwe – has until now been left untested in the modern era.
It may get such a trial next month, when Japanese policymakers meet to discuss their next salvo against deflation in June.
Japan’s central bank, which has already experimented with mass quantitative easing and negative interest rates, is viewed as being on the cutting edge when it comes to unleashing monetary stimulus.
George Saravelos, a Deutsche Bank strategist, says that “with Japan fast approaching the limits of its existing reflation project, it is a canary in the coalmine for the next global policy innovation”.
In reaching for helicopter money, some worry that Japan will have pushed too far.
“Over the past several months, there has been more and more talk about what central banks could do should a recession come,” says Toby Nangle, a Columbia Threadneedle fund manager.
Some central bankers believed that they could stimulate their respective economies by moving interest rates below zero. Nangle suggests that these moves have highlighted the problems with taking interest rates too low.
The lower rates go, the more tempting it will be for households to take their money out of banks, a privilege they may have to pay for, and instead decide to hoard it. That is unless governments choose to take extreme steps, like abolishing cash, in order to deal with the side effects.
Policymakers are looking for other options, and helicopter money, an idea popularised by Milton Friedman, the Nobel prize-winning economist, has come back onto the scene.
Central bank-issued money could be used to fund tax cuts or infrastructure spending in an attempt to boost growth.
The idea has burst into the mainstream, with former central bank officials openly discussing helicopter money’s use, while current staffers try to downplay the prospects of its deployment.
Money depends on the public’s trust in it, and Nangle argues that this trust can be “fragile”. Playing around with printing money, even where policymakers believe they have run out of other options, could be dangerous territory.
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