What the heck is...

What the heck is… helicopter money?

By Oliver Smith 3 August 2016
Summary

Explaining the buzzwords of the moment: What is helicopter money and what does it mean for your finances?

Our weekly series What The Heck Is… exists to shed light on the strange unexplained acronyms and unfamiliar buzzwords that creep into our everyday lives.

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Economists love bad buzzwords, from ‘leveraged buyouts’ to ‘austerity’ and ‘recession’, and now there’s a new phrase in town.

You might not have heard of ‘helicopter money’ yet, but chances are you will soon.

What the heck is helicopter money?

It’s not a new word, famed American economist Milton Friedman actually coined it in the 1960s, and it’s now being discussed at the highest levels of banking.

Milton Friedman came up with helicopter money in the 1960s, but it's never been tried.

The idea is simple enough. It’s when a central bank, like the Bank of England, prints money and gives it directly to people to spend. When given cash most people will do the same thing, they’ll spend it, which in turn could give the whole economy a boost.

The money could be in the form of a tax rebate for every household at the end of the year, or it could be as simple as everyone receiving a nice cheque in the post.

Yes, free money.

It may sound simple, but it’s never happened before.

Now, you might say, isn’t that what happened after the financial crisis in 2008? Quantitative easing?

Well kind of.

Quantitative easing is when the Bank of England creates money and uses it to buy financial assets from banks. In return for the money must agree to certain conditions, , like using it to lend to small businesses or for giving out in mortgages.

Free money feels great, but not if the economy is tanking.

Why is helicopter money in vogue?

Basically because there are a number of countries that have already slashed interest rates to record lows in the wake of 2008 (it encourages people to spend rather than save in their bank account). Despite this the global economy appears to be getting even worse.

In Japan the government already has negative interest rates, literally charging people to store money, and the economy is still in a spiral of deflation with falling prices.

Helicopter money is being discussed as one of the last remaining options to get people spending.

The Bank of England is poised to cut interest rates in Britain this week to an even lower 0.25% this month to stave off some of the negative impact of Brexit on the economy.

Once that’s been done, there will be few options left to kick start the economy.

What does it mean for you?

Right now, nothing.

But the next few months will be crucial as countries around the world watch to see what impact Brexit could have on their economies.

If people do stop spending money and if businesses stop trading, then there’s a chance some countries might start handing their citizens some free money to encourage a boom in spending.

So you might get free money, but you could be living in a country with a failing economy.

Better get the helicopters ready.

Our weekly series What The Heck Is… exists to shed light on the strange unexplained acronyms and unfamiliar buzzwords that creep into our everyday lives.