Central bank policy makers could start using “helicopter money” to stimulate growth and avert deflation, according to asset manager Lombard Odier.
Federico Belak, CIO of tactical trading funds and fixed income at Lombard Odier Investment Management, said that because negative interest rate policy (NIRP) is both eroding capital, undermining the financial system and failing to produce nominal GPD growth, central banks and governments are moving towards so-called “helicopter money” policies, or freely giving money to the public to spend as they wish.
Belak said Japan is leading the way in this direction, because it has spent a long time mired in deflation and its quantitative easing programme is running out of steam. He said: “A helicopter drop would potentially reduce the value of money and further destroy wealth, and some asset markets are not priced to withstand a massive policy shift without permanently destroying capital.” He said that gold and cash should be considered in this scenario by investors.
However, a different view was expressed by BCA Research in its latest global investment strategy report. It said that central banks should be printing money to buy up and cancel government debt, in order to give more scope to cut taxes and increase spending. It commented: “Wouldn’t this destroy central bank balance sheets and undermine their credibility? The answer is ‘no’. The cash that you have in your wallet has no expiration dates and earns no interest. By definition, a liability with no fixed maturity, and which pays no interest, has a net present value of zero. Purely from a balance sheet perspective, ‘helicopter drops’ do not harm central bank solvency in any way. What helicopter drops do is flood the economy with money, pushing up inflation in the process. When inflation is low, that is a good thing.”