As we pass the eighth year of a bull market, many investors are wondering whether central banks have any tools left with which to intervene should we enter another global recession. The answer is no, they don’t have much ammunition left, which is why we’re hearing more about fiscal policy—and part of that fiscal expansion could come in the form of “helicopter money.”
One type of helicopter money occurs via infrastructure investments. A country’s Treasury department issues bonds directly to its central bank, which agrees not to sell the bonds so that the money cannot be pulled out of the system. The country’s government then uses that cash to make infrastructure investments that spur growth.
The problem is that most developed countries already have very large ratios of debt to gross domestic product (GDP), so their populations have little appetite for spending and are pushing back against that type of profligate activity.
Moreover, it takes a long time for infrastructure investments to influence productivity. They often take a long time to get approved; they may take a long time to contract out; and they take a long time to build. So, these tools would not necessarily be effective in a recession.
In fact, to be effective, the Treasury would have to issue the debt to the central bank, the central bank would have to provide money to the Treasury, and the Treasury would have to give the entire population an immediate cash injection via tax refunds. In that way, individuals could spend the cash in whatever way they pleased, spurring growth in the process. That’s another type of helicopter money.
When it comes to helicopter money, then, the only question is how you drop it. Is it infrastructure-enhancing, or is it more consumption-oriented? Either way, there aren’t many options so if we enter another recession it will likely be a frightening affair for market participants.
Moreover, helicopter money can create significant “waves” that can influence an investment’s market price. Markets have performed very well since March 2009 following the global financial crisis, and it may seem like equities are the way to go.
But if something can’t last, it won’t—and that’s exactly why we actively manage our exposures, both long and short, across global equities, global fixed income, and currencies.