Monday, April 18, 2016

Helicopter money defined

It is called Money Financed Fiscal Expansion.  Better to say money financed deficit spending.

There are two forms of it.  The Fed could create money and the money could be sent to households.  That is not being considered because of the fear that people will save the money or pay down their debt.

What is being endorsed is the Fed creating money and giving it to the Treasury.  The federal government will spend the money into the economy.  Since the velocity of money is 1.5 times it is felt that this will kick start the economy even though it is believed that the government will spend the money inefficiently.

The worry is expectations.  If the program is thought to be too little or too much it will fail.

Too little and we get lower yields and a lower stock market and no improvement in the economy.

Too much and we get inflation expectations above the Fed target rate. Bond yields would spike upwards.

Getting it right on the other hand and we will see economic growth, moderately higher interest rates, and a higher stock market.

Good luck with micro managing every aspect of the financial economy.

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