Helicopter Money

the editor   |   thursday, feb 16, 2017
 

The Optimum Quantity of Money

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The excerpt above is a little piece of economic theory – specifically, Milton Friedman’s theory about the effect of the quantity of money in an economy on the potential rate of inflation. “Helicopter money” is the concept that one can spur inflation and eliminate disincentives to engage in productive economic activity by placing cash in the hands of spenders. When the spenders spend, it pushes prices up, ever so slightly at first, which eliminates the price complacency of other potential buyers, who may also follow suit with their purchases to avoid a rising tide of prices. This wave of price action is expected to spur additional economic activity, lifting all boats.

“Helicopter money” is often used as a counterpoint to the contemporary method used by central banks to manage interest rates, which these days begins and ends with “quantitative easing” – “QE” for short. QE is (rightly) criticized as being needlessly skewed toward wealth creation among the top 1% asset holders (i.e., those who are already wealthy), while “helicopter money,” the argument goes, is the everyman’s approach to monetary economics.

Why is “helicopter money” more democratic than QE? Because it places money directly in the hands of individuals without regard to whether they already possess financial assets; QE can only directly touch folks that already have substantial financial investments in the economy.

But how does the government or central bank give effect to “helicopter money?” And more importantly, how would they do it without triggering an issue of confidence in the value of money? No easy answers.

Quantitatively pleasing

Imagine now that it is not a helicopter that drops money around your community but rather it is you, with a mobile payments app called tiptotem. Or perhaps rather than dropping the money you would rather walk around, picking it up wherever you find it. Either is possible using tiptotem’s #moneydrop.

We use the #moneydrop to drop cash at countertops, in tip jars, and all around town with our favorite businesses, bodegas, bartenders, and baristas. They can pick up the cash whenever they want. For the joy of money.

We’re just laying this out there for our central bankers to noodle on – what if they drop virtual money around the country all over in random places for people to scavenge around and pick up? It really would be a pretty good virtual replication of the “helicopter money” thesis. Central bankers can do this with our #moneydrop. So can you. It is pretty sweet to find money laying around! Or drop it wherever you want for your recipient to pick up later.

So, what is the optimum quantity of money folks should get through “helicopter money?” We reckon it is a lot. What we’ve done in tiptotem is generate a suite of tools centered around giving and receiving money and making connections with the people you interact with economically. We’re trying to turbocharge earning power and we’re trying to make giving money more fun too.

The velocity of money

What is it really that “helicopter money” accomplishes that QE cannot? It increases the velocity of money – because it places cash into the hands of the most likely spenders. QE does not do this because it places cash in the hands of people that already have a lot of money. And a higher velocity of money is necessary to trigger inflation.

We think central banks really need to go digital and reach economic actors more directly. While the financial engineering behind QE is admirable for its theoretical purity, it is in practice reliant on antiquated concepts of intermediation that need no longer constrain central bank action in a world where technology disintermediates the seller and buyer, the investor and entrepreneur, the politician and polity.

Technology allows central banks to reach each individual in the country directly. So why do central banks only deal with other big banks? It is increasingly hard to see why central banks cannot adopt disintermediation technology to put a finer point on policy execution.

So, what’s “helicopter money” and how do we increase the velocity of the USD?

There’s a platform for that.