The RBA showering Australian households with money from above may sound like a desperate move, but it is one worthy of consideration according to the economics team at the big investment bank Citi.
- Citi economists argue “helicopter money” in the form of cash payments to households would stimulate the economy and solve the RBA’s inflation problem
- The analysts argues this would give the RBA more bang for its buck given interest rates are already low
- The money could be raised by the RBA “buying” perpetual bonds from the Federal Government that would not need to be repaid and the proceeds given to households
Rather than slashing interest rates to zero, or below — a ploy adopted by several big central banks — Citi argues the RBA would be better off embracing the unconventional policy of “helicopter money”.
“It could take the form of government cash handouts to households for spending, financed by a permanent increase in RBA money supply,” Citi’s chief Australian economist Paul Brennan said.
“Unlike negative interest rate and quantitative easing policies, helicopter money can be designed to boost economic efficiency [e.g. lower unemployment] whilst limiting negative spill-overs to other areas like financial system stability [e.g. asset bubble risks] and distributional equity [e.g. wealth inequality],” Mr Brennan wrote in research note.
“Helicopter money” was an idea floated by Nobel economics prize laureate and free-market advocate Milton Friedman in the late 1960s.
It was later applied, in a rather disparaging way, to former Federal Reserve chair Ben Bernanke, who received the sobriquet “Helicopter Ben” from critics of his quantitative easing (QE) and money printing policies to bail the US out of the global financial crisis.
At its most basic, helicopter money is used by a central bank wanting to drive up inflation and a stagnant economy’s output.
The extra money floating around in an economy, in theory, would increase household spending, kick the broader economy up a gear and ultimately drive inflation back up to a central bank’s target.
Core inflation — the RBA’s preferred measure of consumer prices — has now been stuck below the target 2-to-3 per cent target band for three years.
Weak first quarter inflation figures have brought forward the market’s pricing of a rate cut, with many observers suggesting the RBA could start cutting at its May board meeting.
More than cuts may be needed
Citi had long resisted the “rate cut call”, but the surprise result hitting prices such as clothing, housing costs and domestic holidays led Mr Brennan and his team to argue the RBA needed two 0.25 percentage point cuts, almost immediately — in May and June.
The persistently low inflation rate has pretty well ticked the box for one pre-condition the RBA has cited for a rate cut. The other is unemployment creeping up.
Citi said other problems would need to develop for helicopter handouts to be layered on top of any rate cut.
These include weaker global growth leading to further easing from major central banks and problems at home, such as house prices falling further and for longer than expected, placing household balance sheets under more severe pressure with increased incidence of negative equity on mortgages.
“The downturn in apartment construction could be larger than expected, weakening employment,” Citi’s note said.
“The combination of these developments could see sharply weaker employment, consumer spending and inflation, triggering extended rate cuts by the RBA.”
Not much left to cut
Unconventional economic policy has crossed the RBA’s mind, as deputy governor Guy Debelle conceded to business economists late last year.
“We have also been able to examine the experience of others with other tools of monetary policy and have learned from that. Hopefully, we won’t ever have to put that learning into practice,” he told the gathering.
“QE is a policy option in Australia, should it be required.”
Single rate cuts are uncommon, with the RBA on average cutting 3 percentage points in its last four easing cycles.
Similar action would take the RBA from its current cash rate of 1.5 per cent deeply into negative rate territory.
“The historically low RBA cash rate of 1.5 per cent is testament to the limited space currently available under conventional monetary policy in the event of an economic downturn,” Mr Brennan said.
“This begs the question of unconventional monetary policies [UMPs] like ‘helicopter money’ measures which tend to be characterized by a permanent increase in the money supply.
“Whilst on the experimental end, we think it deserves serious consideration by the RBA which with the benefit of hindsight have observed both the advantages and disadvantages to other UMPs like quantitative easing.”
The key difference between quantitative easing and helicopter money is the channel through which the extra funds pass — QE is done via the banking system in an attempt to lower long-term interest rates, while helicopter money passes directly to households in an effort to boost disposable incomes and spending.
Handouts get a bigger bang for the buck
Mr Brennan said in theory helicopter money has the potential to be “highly stimulatory for growth and inflation, which implies higher interest rate yields … and currency depreciation in the Australian dollar”.
Direct cash payments to households are far from unprecedented and were last deployed in a major way in Australia at the onset of the GFC.
“Go hard, go early and go to households,” was then-Treasury secretary Ken Henry’s advice at the time as more than $20 billion was dispatched via payments to pensioners, carers, child payments and tax refunds targeting at low-to-middle income earners.
Mr Brennan said the outsized payments — amounting to around 2.5 per cent of annual household disposable income at the time — in conjunction with RBA cuts, saw consumer spending rebound quickly after nine months of contraction.
“We would expect a similar response in the case of a large helicopter drop of payments to households and the response could well be larger given that more households are probably income constrained now as wage growth has slowed materially since the GFC.
“Tax cuts are more incremental — smaller amounts per week — and therefore are more in the nature of structural measures rather than a fiscal stimulus.
“And cash payments to households are less likely to encourage greater leverage and asset price inflation than would negative interest rates.
“Handouts get a bigger bang for the buck.”
Not difficult but blurs RBA independence
Citi argues raising the money would be simple enough and would not harm financial stability.
One option would involve the Federal Government making a permanent draw-down on its short-term overdraft facility with the RBA.
Alternatively, the RBA could directly purchase perpetual Commonwealth bonds, creating a debt that would never have to be repaid with the increase in assets offset by a corresponding permanent increase in liabilities on the RBA’s balance sheet.
There are few, if any, legal impediments to the RBA deploying helicopter money, but it would need Federal Government support in distributing the largesse.
While a government would probably have few qualms about sending out the cheques — particularly ones that do not blow up the budget — removing the political context from actions of the independent central bank may be a trickier proposition.