The Fed’s latest and greatest monetary policy tool - how the US made it rain
Opinion Analysis by Sandro Joseph Azzam, Staff Writer
April 18th, 2021
Remember that scene in La Casa de Papel where the protagonists release a ridiculous amount of cash from the sky using blimps? The scenes of hundred euro bills magically floating down from the sky as if it were raining definitely marked a large part of the audience because, after all, don’t we all wish that money grew on trees or fell from the heavens? Whilst the couch bum in me was amazed at the ingenuity of the plan, the economist wasn’t surprised at all… What was being done is actually known as “helicopter money”.
No, I don’t mean to imply that at some point in time in our economic history it magically started raining Ben Franklins over an amazed crowd. Helicopter money however works in the same way it did when it rained cash over Madrid. Imagine a helicopter loaded with cash doing the exact same thing as the blimps: distributing money in an extremely disorganized way to the masses. Whilst I wish that’s how the economic theory worked, it’s not quite there. What we need to notice in this theory is that the money is disbursed in a way that is practically random and you get to pick up the cash regardless of whether you need it more than the homeless man down the street. Welcome to helicopter theory.
A term first coined by Nobel Prize winning economist Milton Freidman, helicopter money consists of indiscriminate payments of cash to individuals in a bid to stimulate the economy. If you magically had an extra $1400 pop up under your mattress, odds are you’d spend them. What you’d spend them on is subject to a larger debate. Although I personally would love to see an obscene amount of cash raining from the sky, this unfortunately isn’t the most IRS-friendly of ways for the government to undertake massive cash distributions which is why these stimulus checks have been deposited in the beneficiaries’ bank accounts through direct deposits.
The concept of helicopter money was first introduced to the general public by Ben Bernanke, an economist turned Chairman of the Federal Reserve (think of him as a bald Riad Salame with a side of e pluribus unum). He famously introduced these helicopter drops to the world in 2002 earning him the name “Helicopter Ben”. Little did he know, we’d end up needing to follow Arnie’s advice and “get to the choppa” just under two decades later with the COVID pandemic.
In light of the COVID-19 pandemic, Capitol Hill and the White House saw a need to get people back to spending money. If people don’t spend money, the economy falters and we enter a cyclical loop of economic and financial limbo. The best solution according to policymakers? “Get to the choppa” of course. Helicopter money was seen as the ideal solution. Washington believed that giving people more money to spend would mean that, well, they’d spend the money. This unfortunately didn’t end well…
Instead of the “stimulus checks” hitherto referred to as “stimmy”, as coined by r/wallstreetbets users, being used to buy groceries, pay rent, buy essential products and contribute to the real economy, evidence shows that recipients of the checks put the money towards their stock trading accounts. When global stocks fell off a cliff about this time (mid-March) last year, talks of an incoming “stimmy” were getting more and more concrete. People decided to pull a Warren Buffett-like move and “buy the dip”, that is, buy into the stock market when it is at a very low price with the hopes and expectation of it bouncing back in the near future. That’s exactly what happened. Whilst valuations took a punch in the face and tanked over 30% in the span of a week, what we witnessed in the coming week was just as impressive. What we witnessed was a “V-shape recovery”. Cut the letter V in two pieces. The first is downward sloping and the second is upward sloping with both extremities ending up at the same latitudes. Global markets soared almost just as quickly as they tanked. The big question is: does that make sense?
Easy answer: no. Financial markets are made to reflect 2 elements: fundamental values, i.e. the state of the economy, and noise from extra buying and selling activity. Note the use of the word “extra”. When a pandemic strikes the world forcing entire nations to shut down for weeks on end, leaving tens of millions unemployed and all but putting the final nail in the coffins of a host of industries, how do we expect the economy to go? Really bad if I may say so myself. I’m not talking Lebanese-financial-crisis kind of bad but a lot like Spanish Debt Crisis kind of bad. Then how on Earth did financial markets bounce back?
Remember that noise I was talking about earlier? Seems like someone cranked up the volume… Now that people had extra money to spend, they decided to throw it into financial markets creating massive buying activity. Financial markets operate on the concept of supply and demand and when demand is high, prices shoot up. Think of it this way, after everyone decided to buy the stocks, the markets at large showed that the state of the economy in 2019 was just as good as it was in May 2020 in the midst of a pandemic. There’s clearly something that doesn’t make sense.
Instead of the stimulus checks being put to good use, they went right into the markets serving absolutely no real purpose to the economy. The average shop owner doesn’t really care if Apple stock is trading at an all-time high; he wants to sell his merchandise to make a living. After the 1200$ stimmy in the CARES act came a second 600$ one towards the end of the Trump presidency. A third stimmy was passed by Congress in March 2021 under the Biden administration that would send out 1400$ checks to Americans making under 75.000$ a year.
Unfortunately, it seems like a lot of this money is going to waste. The way Congress is able to afford sending people these amounts of money is by taking on national debt. The United States ask the world for a loan to put it simply. Given America’s credit history and 800 international FICO score, people line up to throw money at Uncle Sam. But just like all loans, they must be repaid eventually. There’s no such thing as free money (unless your name is Jerome Powell) so someone is going to need to foot the bill for the $2.2tn CARES act and the Biden administration’s $1.9tn relief bill. Although the stimulus checks aren’t the only part of these packages, they make up a non-negligeable sum…
Think of it this way: if the government is giving you a total of 3200$ but is taking out a loan to give that money to you, it’s going to need to pay the money back, right? But how does the government make money? By taxing you. What this means is that you as a taxpayer will gladly receive a stimulus check, but the consequence is that you will likely be paying higher taxes in the not-too-distant future in order to pay for that same stimulus check you received. This carries concepts similar to those cited by David Ricardo in his Ricardian equivalence, a concept that we won’t tackle in this article.
To put it simply, we moved from a single helicopter to an entire fleet. Helicopters Ben, Jerome, Joe, and Donald all gave people a lot of money. This money went to the wrong place and created an overvalued stock market prime to pop at any moment. But wait, there’s more! The best part is that you’re going to have to pay for this 3200$ stimulus check indirectly through higher taxation, and odds are, you’re going to be paying way more than what you got in the stimmy. How do you like the idea of it raining money now?