The balance between the monetary base and the available amount of goods and services is provided through the system of prices. If the parity is broken by excessive issuance of money, prices will have to change too, and inflation may soar.
That’s a basic monetary law.
However, economic laws do not have the fixity of natural laws, and some economists are now contending that there is some decoupling between money supply and inflation.
One of the possible reasons is the savings glut (an expression created by Ben Bernanke), that is, large swaths of money held by funds, millionaires, corporations… that is not being invested into the production system.
Also, contrary to what happened in the ’80s, the economy is not experiencing demand-inflationary pressures. That is especially evident in the US, where there aren’t such things as powerful wage claims of trade unions, high costs of energy imports or high propensity to consumption in areas like food or travel.
Besides, contrary to the situation of forty years ago, there are strong anti-inflationary forces, especially due to the effects of cheap imports from Asian countries.
In the US there is another important factor, explaining the decoupling between inflation and money supply: the role of the dollar as a safe-haven refuge currency, with a wide international demand, especially in periods of crisis. The FED can significantly raise the money supply without having to worry too much about a significant devaluation of the dollar – a factor that plays a vital role in the American economy.
In short: there is a wide set of elements that can hold down inflation.
Also notice that low rates of inflation – say 2 to 4% – are manageable and even positive (they are a current macroeconomic goal).
All these factors are important and favor the use of helicopter money.
Anyway, the are also forces pushing in the opposite direction.
As Fareed Zakaria states in CNN Fareed’s Global Briefing, citing Kimberly Ann Elliott in World’s Politic Review and the Global Trade Alert, says: “as the virus spreads, so too are export restrictions, particularly on masks, gloves, gowns and other protective equipment.”
But not only that: the export of pharmaceuticals is also being subject to restrictions, and “some major food-producing countries have also begun limiting exports of wheat and rice, including Russia, Ukraine and Vietnam.”
This may reverse the anti-inflationary trends – which is not the case at the moment.
Anyway, regarding helicopter money policies, we should not forget that all depends on the amount of money being created, both at a national scale and worldwide.
That’s the big issue.
If most countries resort to helicopter money, that will raise the risks of inflation. If just a few countries do it, the risks will be much smaller.
Somehow the Chinese have issued high levels of helicopter money in the last decades. China has created Rmb144tn ($21tn) of new money since 2009 – more than twice the amount of money supply created in the US, Japan and Eurozone combined over the same period.
And that’s revealing. It shows that it is impossible to set up, in advance, a ceiling for the amount of helicopter money to be created. It depends on a number of factors, varying from country to country, including economic expectations, debt levels, or issues like the role of the dollar, the diversification of the economy, the type of banking and so on.
Take the case of the US. Creating some hundred billion dollars in helicopter money would not be a big deal. But now imagine trillions. What would happen?
See on this issue: Helicopter Money is different from Quantitative Easing