Central Bank Quantitative Easing Is Always A Helicopter Drop (It Just Depends on Who Gets The Money)

A Benjamin Cole post

Of late in monetary blog-land has been bruiting about central bank helicopter drops, usually defined as a last resort to boost aggregate demand and fight deflation.

Traditionally, a helicopter drop has been the printing of paper money to aeronautically enrich a euphoric hoi-polloi. But now many monetarists consider digitized quantitative easing (QE) to finance or offset national fiscal deficits or  tax cuts to be a chopper-toss as well. In other words, print money and finance government.

But thinking it over, QE is always a helicopter drop. It just depends who gets the new money.


Okay, in the years 2008 to 2014, the U.S. Treasury ran red ink and sold Treasury bonds, and the Fed digitized money and bought $3 trillion+ in Treasuries, through its QE programs. One does not have to be a cynic to conclude that the Fed printed money and gave it to the federal government, and Columbia economist Michael Woodford, sotto voce, pretty much says so.

So, the institutions and people who sold Treasury bonds into the Fed’s QE program (through the middlemen primary dealers) received in exchange for their Treasuries digitized cash. They received a “helicopter drop” of money, but in exchange for their bonds (bonds that were somewhat appreciated by QE, btw). In this regard there is no moral hazard.

Even today, no one really knows what people who sold Treasuries into the Fed QE program did with the $3 trillion+ in cash they got. We know the $3 trillion went into bank accounts, securities, property, cash or consumption, but by what fractions is unknown. There were property and equity recoveries during the Fed QE years. Some aver that conventional QE was a helicopter drop, but onto asset markets.

But by another conceptual lens or viewpoint, even in the Fed’s conventional QE the taxpayers received a helicopter drop too. Federal taxes were relatively lower than otherwise during QE, as federal government operations were financed by Fed money printing and buying of Treasuries. Net, the federal government stopped borrowing money, or taxing enough to finance operations, and used Fed-created money.


QE is always a helicopter drop.

7 thoughts on “Central Bank Quantitative Easing Is Always A Helicopter Drop (It Just Depends on Who Gets The Money)

  1. Excellent points.

    For the record. A lot of the time the bond sellers merely sold back book government bonds and bought (actually, HAD to buy) new, front book, ones. The sellers HAD to maintain their overall stock of government bonds to balance their liabilities: to possible life or general insurance claims, to pensioners, to mutual fund holder, to depositors, etc etc. Thus “they” did nothing with the new money except buy very similar replacement investments. The structure of “their” balance sheets dictated it.

  2. James–thanks for reading.

    I think conventional QE works. I think more-overt helicopter drops would work better. Just cut taxes, and have the Fed buy bonds.

    To boost consumption, I would prefer tax cuts on people who will spend the money.

  3. That is sort of what happened. The new money was “laundered” through financial institutions but really spent by one of those who spends it all, the government.

  4. I think you are right. On the other hand, it was also a helicopter drop into capital markets. Capital markets that are already glutted.

  5. Not really a helicopter drop for capital markets if it just ends up as excess reserves.

    The non-bank capital markets institutions (pension funds, liege and general insurers, mutual funds, hedge funds, non-financial corporate treasuries) all have balance sheets that have to balance. They sell something, they have to buy something else or hold cash. Treasury and MBS holders who sold to the Fed just had to find replacement securities or hold cash.

    The big creator of replacement securities has been the US Treasury, as we know.

    Banks can, of course, just bung the cash received from selling their securities to the Fed (or cash received on deposit from institutional sellers of securities to the Fed) back to the Fed as excess reserves – which banks have done, in size, and totally pointlessly for monetary policy purposes.

  6. I agree with this basic premise. QE is a “helicopter drop” as many now define it. I always thought a helicopter drop meant creating cash and giving it away without buying an asset that would let the Fed extract that cash again in the future. If the problem is that the Fed has no credibility in the inflation creating sense, giving away cash should do the trick.

    Bernanke said in his book that he purposely used IOR to get the banks to hold the cash as extra reserves. I’m totally at a loss to understand this. If the Fed had left IOR at 0% (that was “normal” for 95 years), I think the QE that was done would have had more impact, more quickly. [sarcasm ahead] I’m surprised that the Fed didn’t create a quadrillion dollars and bury it in the ground and issue a statement that it would destroy the cash once inflation hit 1.9% and then act surprised when a quadrillion of cash had no impact on expectations.

    Message to Fed: Normalize IOR now! (ie, cut that to 0% so we can get some more velocity)

    • Bill and James–great comments. Bill your sarcasm would be funny if it was not so close to the truth!
      James– you should do a post on your comments here. I think I disagree with you, but I would like to read your views fully fleshed-out.

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