Is helicopter money falling from the sky?

A quick call from Nelson Lam of The Lam Group asking about the concept of “helicopter money” got me thinking about monetary policy and why the stock market is exploding. Market pundits are now calling Chairman Bernanke “Helicopter Ben” based on his latest cut of 50 bps. Gregg Mankiw as well as James Hamilton also wrote about the topic last week.

The concept of helicopter money has been around for decades and has been associated with Milton Friedman as well as Keynes in another form. The idea is to run a thought experiment of increasing the money supply through the analogy of money dropping from a helicopter. If there was a one-time increase in money, the thought experiment reviews the impact on inflation and aggregate demand. In a rational expectations world, there may not be an impact on aggregate demand as prices will increase with the increase in money. Under different expectations, there may be a short-run impact on aggregate demand.

The last time the “helicopter” analogy was discussed seriously in policy circles was during the zero interest rate period in Japan. It was believed that monetary policy should have pushed money into the economy to ignite inflation and end the problem of deflation. The issue of how to deal with a liquidity trap in Japan was real. This issue needed careful analysis beyond the normal policy alternatives and helicopter analogy was good starting point for discussion. The US is not Japan. We are not in a liquidity trap.

So does Chairman Bernanke fit the name “Helicopter Ben”? There is no doubt perception is that the monetary flood gates have opened and it is raining dollar from the Fed. The Fed has moved away from looking at inflation fears and is now firmly interested in stimulating growth. Of course, the Fed has mandate to look at more than price stability. The equity markets believe that the growth goal will be achieved even if it means further lowering of rates. Both the gold and dollar market thinks the floodgates are open. Commodity prices are rising albeit mostly due to supply shocks.

The Fed has lowered the rate but it may be early to assume it is raining money. The real rate of interest is actually positive which is not suggestive of an overly loose Fed policy. Inflation fears are up but the bond market seems to be looking in more detail at the impact of the rate cut. If anything, the decline in housing is having a greater effect on bonds. TIPS prices have not exploded higher and are at levels we saw before the rate decline. Ben may be a “chopper pilot” but it may be early to say he has taken to the air.