Helicopter money, Quantitative Easing and cryptocurrencies: a strange relationship

The term Helicopter money refers to an idea popularized by the American economist Milton Friedman in 1969, but what does it have to do with cryptocurrencies?

At that time, Friedman was able to take theoretical reasoning to a practical level with the use of a metaphor:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated”.

The use of this concept and those elaborated later, referring to an increase in the monetary base, is the basis of the critical narrative that is motivating the Bitcoin community and part of the Ethereum (DeFi world) community. They leverage the capabilities of their ecosystem to overcome the systemic problems highlighted by what, to all intents and purposes, looks like a new financial crisis.

Friedman’s theory was renowned for being regarded as a stimulus to spending driven by liquidity provided directly to citizens who, perceiving it as an unexpected income, would be inclined to use it immediately, thus stimulating the economy.

The current Quantitative Easing (QE) programmes undertaken by central banks after the financial crisis are very different. They involve large-scale purchases of assets from the financial markets. 

The problem is the coordination between the activities of central banks and the fiscal and economic policies of the states they affect. 

Without proper coordination, the efforts of a model could be frustrated and perhaps even worse. That is why, while both affect the total monetary base, they can have very different effects on inflation.

The main difference between QE and Helicopter money is that the money from QE does not end up in the real economy as it should, but it mitigates reserve constraints in the banking sector (a possible reason why these reduce loans) and lowers the cost of public lending.

Quantitative Easing during COVID19

Recent statements by the Fed and the ECB see the US and Europe at the forefront of economic stimulus in the wake of the collapse of financial markets during the COVID 19 crisis.

FED, 700 billion divided into: 

• $500 billion in Treasury bonds and 
• $200 billion in mortgage-backed securities. 

Purchases will begin immediately, with $40 billion in purchases to be held on Monday.

ECB, 750 billion divided into:

• public and private sector securities until the end of 2020. 
• Greek debt 
• non-bank commercial paper (bills of exchange with which many companies are financed)

The coordination between what central banks are doing and the policies of individual states is not clear. It remains to be seen how the situation will evolve in the coming months.

According to JP Morgan, the effects on the system caused by QE are the following:

• Bubbles in assets and a collapse in capital spending.
• Zombie companies and low productivity.
• Low yields destroy savers, making the rich richer.
• Increased escalation of currency wars.
• NIRP hurts the economy and stifles credit supply.
• It distorts repo markets due to collateral shortages.
• Pension funds paralyzed due to rising deficits.
• QE forces consumers to save even more.
• The rise of populism and political friction.

According to many analysts and economists opposed to Keynesian policies, financial engineering does not help the economy, it damages it. If it helped, the Japanese economy should have exploded following the massive injections of QE in every conceivable form. The Japanese economy is an example of how these policies have failed.

About 90% of the population receives little or no direct benefit from rising stock market prices.

The promise of cryptocurrencies

This is where the narrative of an alternative digital monetary system arises, in which the choices on the monetary base are not in the hands of the dynamics described above.

It all started with Bitcoin, a source of diversity with respect to traditional monetary systems which, by design, has a fixed supply of 21 million. This model laid the foundations for the digital concept of money so dear to the Austrian economic school, represented by the writings of Saifedean Ammous.

Addressing the technology in a more didactic way, one understands that in reality the code is editable and with it the maximum supply of 21 million BTC, but only under certain conditions, which depend on a synergy between different systemic actors closely linked to the intent of the community.

Of more recent development, however, is the growing enthusiasm for DeFi, headed by the Ethereum blockchain, which is a new financial instrument capable of increasing transparency by proposing a completely new and disintermediated model to manage digital money through lending platforms and tokens representative of traditional currencies or assets of various types.

Disintermediation and transparency are the main objectives of the community. 

There are those who believe that, after this moment of panic, a lot of FIAT money will seek shelter from a traditional financial system in disarray.

It cannot be excluded that people’s distrust towards the choices of big institutions and politics will not contribute to fuel an alternative that has been preparing for mass adoption for more than ten years.