With all due respect to helicopter aficionados

Ray Dalio made some comments about the ineffectiveness of quantitative easing in terms of restarting the economy. I largely agree with the premise. Until the helicopter money part.

From Jenn Ablan’s story at Reuters:

“Monetary Policy 3” or MP3 will have to be directed at spenders more than at investors and savers, he said.

Dalio, who characterized lower interest rates as MP1 and quantitative easing as MP2, proposed some scenarios in which MP3 could be implemented.

“We can say that the range will extend from classic fiscal/monetary policy coordination – in which debt to finance government spending will be monetized – to sending people cash directly – i.e., helicopter money – and will likely fall somewhere between these two -i.e., sending people money tied to spending incentives,” Dalio wrote.

Helicopter money is a reference to an idea made popular by the American economist Milton Friedman in 1969 that dropping money out of helicopters for citizens to pick up was a sure way to restart the economy and effectively fight deflation.

Far be it for me to engage in a debate about economics with Ray Dalio at Bridgewater, who knows more about the subject than I ever will, but….

I’m not sure I agree with Dalio’s idea that dropping money from a helicopter will actual be an effective deflation-fighting mechanism. And I say this not as a wannabe economist, but as an observer of actual human behavior.

The main problem with windfalls is that the money doesn’t get spent, for the most part. People tend to save what they perceive to be a non-recurring source of income, like a bonus or even the benefit of lower gas prices. They don’t change their lifestyle by adding permanently higher expenses to it.

This is why the wealth effect from the stock market isn’t doing much for the overall economy – even people who’ve benefited from it don’t perceive the recent bull market as trustworthy. They remember all too well how quickly this paper wealth can disappear.

Economists are perplexed about why we didn’t see the money saved from a halving of oil prices show up in the economy. There was no velocity whatsoever to these extra dollars in people’s pockets. Americans went out to a few extra dinners, bought some more SUVs, but that was pretty much it. The money went toward paying down debt or adding to savings.

The same would happen if the Fed, say, put $5000 directly into every household’s checking account. No one is going to upgrade their lifestyle and change their spending habits enough for it to show up in GDP. It would just be more dollars held in financial institutions, more Treasury bonds purchased by money market funds.

The problem we face now is that asset price inflation is not translating into increased velocity of money, at least not in the way that rising wages would. When people get a salary increase – as opposed to a bonus – they do make some upgrades to their lifestyle and this does become helpful to the economy.

With unemployment now below 5%, the Fed believes we are on the verge of seeing meaningfully higher wages. But there have been too many false starts in this post-crisis recovery to say it’s a slam dunk.

Source:

Bridgewater’s Dalio: ‘Helicopter money’ might help U.S. economy (Reuters)