Quantitative Easing: a policy whereby a Central Bank, such as the FED or the ECB or the Bank of Japan, purchases existing government bonds in order to pump money directly into the financial system; the ultimate goal is to solve banking problems and to promote consumption and investment.
Helicopter money: the creation of money by central banks and its distribution for free to taxpayers in order to solve unemployment and economic problems.
Consider the case of the United States.
Creating a few hundred billion dollars of helicopter money would not challenge the foundations of the American economy and the international status of the dollar. It probably would not cause any significant increase in the inflation rates.
But now imagine creating 2 trillion dollars in helicopter money – the amount of money injected in the banking system by the FED in the form of Quantitative Easing (QE) during the 2008-9 crisis. Would it create chaos and hyperinflation?
That would raise the monetary base by more than 50%… and helicopter money is different from QE.
With Quantitative Easing most of the money is kept in the banking system. That has happened in America, during the crisis of 2008-9. The banks have used the funds to solve their problems, to consolidate their holdings and to raise their stock prices through dividends and stock buybacks. Only a small part of the money was delivered to consumers and companies through credit.
But that would not be the case with helicopter money. With it, the money would be distributed to consumers and injected in the real economy, breaking the balance between money supply and goods and services.
Besides, with Quantitative Easing the central banks can calibrate the purchases, and – in the end – unwind them, by selling the debt they have bought before.
That’s a bit different with helicopter money.
But things are not as straightforward as we sometimes think – or as predicted by theory. Over the past 10 years, the Chinese have created Rmb144tn ($21tn), that is, they have created ten times more money than the amount of Quantitative Easing created by the Americans in the 2008/9 crisis.
In total, China’s money supply stands now at Rmb192tn, equivalent to $28tn – the size of the broad money supply in the US and the eurozone put together (Financial Times, Arthur Budaghyan, from BCA Research).
It’s true that the money created by the Chinese banks and authorities isn’t helicopter money. It’s mostly credit. But since part of it has been lost (in the sense that it has not been paid by the borrowers, nor will it be in the future), it all seems very similar to helicopter money.
These are indeed staggering sums… and they have caused a significant devaluation of the renminbi (more than 10%). On the other hand, they haven’t created hyperinflation – and that’s even more staggering!