If monetary finance sounds a little familiar, it’s probably because it’s the not-too-distant cousin of another unconventional policy: quantitative easing (QE). It may sound harebrained, but monetary finance is only a technical hop away from QE, which was used to extraordinary levels after the 2007 financial crisis. While QE involves (stay with me here) central banks buying government bonds from financial institutions, in order to flood the financial system with new money and push down long-term interest rates, helicopter money involves central banks buying bonds directly from the government — and with no expectation that the debt will ever be repaid.

This could inject money into the economy in a more direct and targeted way. Instead of crossing fingers that liquidity filters through the financial system to reduce interest rates for everyone, helicopter money could take the form of central bank–funded investments in public education or infrastructure, tax cuts for the poor or even just free cash. Indeed, some have called the policy “people’s QE” (with the subtext that its parent should rightly be called “bankers’ QE”). And the stimulus could benefit from the famous Keynesian “multiplier effect,” whereby the injected money gets recycled several times through the economy for a multiplied economic boost. “This is a tool that will always work” to increase nominal demand, says Turner.

Of course, some economists question whether this supposed magic bullet is too good to be true. For Professor Tony Yates at the University of Birmingham in the U.K., allowing this sort of policy could represent a dangerous “slippery slope” — analogous approaches of printing money to fund government spending led to hyperinflation in 1920s Germany and 2000s Zimbabwe. Indeed, established conventions, or in some cases explicit legal structures, forbid this sort of action in most advanced economies such as the United States and the eurozone for that very reason. Advocates say that the policy can still fit around the principle of central bank independence by allowing only the banks — not the politicians — to decide when the helicopters should be deployed. Critics also have technical concerns that it may not work as desired, or even work too much. But even for skeptic Yates, “if I were the Bank of Japan, I would be contemplating it right now,” because of the country’s seemingly inescapable deflationary quagmire. Indeed, “in Japan’s case, it’s not when they do it, but when they admit that they’re already doing it,” says Turner.

In most of the rest of the world, economies are just about muddling through. But know that if things take a turn for the worse, there’s only one unplayed card in policymakers’ hands. Better start loading up the helicopters.

Sourced through Scoop.it from: www.ozy.com