US President Donald Trump proposed sending helicopter money worth $1 trillion as a measure to help the economy recover from the effect of the corona pandemic. He hopes to give a direct stimulus to the economy by providing $1,000 to every citizen. This is an emergency economic rescue package aimed at lifting the spirits of businesses and taxpayers alike. However, this proposal has stirred mixed reactions from the public in general and economic and financial experts in particular. The stocks and forex market also showed its feelings in its own unique ways.
It’s free cash!
In simple terms, helicopter money is free cash. Money is just printed and dispersed among the cash-starved public without them having to repay it. A fixed amount will be credited to everyone’s account for no service in return.
This is done under the assumption that people will spend it on essential things and thus the money will come back to the economy and will keep businesses afloat. Nothing is given to the Federal Reserve (FED) in return for printing additional currency. So, there are no additions to the central bank’s balance sheets.
Why free cash?
In situations like the current COVID pandemic, taxpayers’ remuneration takes a hit. This will reduce demand. In turn, businesses will suffer. This will hinder economic growth and eventually, the economy will come to a halt. In order to prevent this, the government must intervene and provide stimulus to the economy. So they will send free cash to everyone encouraging them to keep spending. This way the government ensures that the money goes where it actually needs to, in order to support the production of goods and services. This will in effect boost the economy and help it recover from the crisis.
This will also increase the confidence of players in the forex market. Investors will become more bullish. This will help recover the market that usually goes down whenever there is a pandemic or any other event of similar nature.
Issuing helicopter money is an unconventional method of providing monetary stimulus. It’s a double-edged sword and only used as a last resort.
Then why didn’t I get this cash?
The million-dollar question that would come to your mind right now would be; “why did my government not give me free cash?”
The answer is simple; the concept of helicopter money does not work in all countries. That’s mainly due to two major challenges.
It does not work in a country where people aren’t cash-starved with an immediate need for liquid cash. In such situations, people will simply use the helicopter money as ‘saving money’ and deposit it in banks, and the banks will be obliged to pay interest for it, and in a crisis, they may not be able to do that.
It will severely devalue the currency and inflation will soar high. If the money remains in the hands of the people, then this will only spur inflation.
Then how come the US can do it?
The US has an advanced economy. The USD is the reserve currency all over the world. Therefore, every other currency will have to face one or the other issue when the value of the USD goes down. This actually helps the US reduce the impact of the cons of helicopter money. This is a unique advantage that the US has. Other countries cannot enjoy this luxury of neutralizing the adverse effects of helicopter money.
On the same tone, one can say that other advanced economies of the European Union can also afford to go the helicopter way without incurring huge setbacks.
Will the markets crash?
The market generally means various indices like the S&P 500, NASDAQ, Dow Jones, etc. Due to the COVID pandemic and the current state of the global recession, these indices have dipped by 35% in the last month alone.
When a government decides to send helicopter money, it will only help these indices or markets to go up. This is because more than a trillion dollars are going into the hands of corporates. This way, the government’s support to corporates will help their stock prices move up. This is because markets move by virtual money rather than physical businesses moving the market. Therefore, monetary stimulus packages like helicopter money will only help the market to go up. One may be justified in thinking that the common conception that the stock market is a reflection of the economy, warrants a revisit.
Now, on knowing about the proposal of helicopter money, forex traders will expect a dip in the value of the dollar in the future, and they will short USD pairs for the long term. Thus, USD pairs, in general, will have a bearish view.
However, as other countries are also taking similar measures, the variations will change, and, in due time, the USD will pick up its lost glory. However, in the short run, the USD value can go down.
In conclusion, forex and other markets react positively to fiscal stimulus packages like helicopter money and will also lift the spirits and improve the economic outlook.