Quantitative Easing, Helicopter Money and Gold

Jon Economy, Fiscal Policies, Gold, Government, Market Commentary, Precious Metals, War

To properly understand helicopter money and its potential effects for the gold market, it is necessary to analyze differences between it and quantitative easing. In some senses, both tools are similar as they support the government budget. Some analysts even call quantitative easing in ‘helicopter money in disguise’. However, there are a few important differences between these two monetary policies, as one can see in the table below.
Table 1: Comparison of quantitative easing and helicopter money.

First, financing of fiscal deficits was not the explicit aim of quantitative easing which was generally conducted independently from the fiscal policy. The purpose of quantitative easing was to purchase financial assets and to stimulate the economy by wealth effects (due to higher asset prices), as well as a portfolio rebalancing effect and inflation expectations – the lower borrowing costs for the government were only a by-product (well, at least officially). On the other hand, helicopter drops are overt money finance and their very aim is the direct funding of government spending or tax cuts. Therefore, helicopter money may be regarded as a quasi-fiscal policy, in fact. Here lies one of the biggest risks connected with the helicopter money. You see, helicopter drops require a stronger cooperation between the central bank and the Treasury. Call us skeptics, but it is not difficult to see that ‘cooperation’ could lead to the loss of independence of central banks. Remember the ‘collaboration’ between the Fed and the U. S. Treasury during the World War II? The central bank committed to keep the Treasury rates low to provide the government with cheap debt financing of the war effort. Surely, the WWII was an unusual time that required unconventional moves and perhaps justified such a pledge. However, the Fed did not restore independence until 1951. Last time we checked, the war ended in 1945, six years earlier. It goes without saying that the reduction in the central banks’ independence would support the gold market. It would wipe out any credibility in central banks’ inflation targeting. The inflation expectations could become unanchored at some point, spurring the safe-haven demand for gold.

This post was published at GoldSeek on 21 October 2016.