Deutsche Bank's Reid: Brexit could force UK to use 'helicopter money'

The strategy involves central banks printing new money and injecting it directly into underlying economies.

Reid, head of global fundamental credit strategy at Deutsche Bank, said the UK’s vote to leave the European Union could force the government to use the strategy as an alternative to pushing interest rates into negative territory or using quantitative easing to reduce bond yields, despite opposition to the idea from the Bank of England.

In a strategy note published on July 8, Reid said of helicopter money: “While we acknowledge the risks in such a strategy, the status quo of ever looser monetary policy and negative rates and yields is arguably more damaging.”

In June, Reid polled “several hundred” asset managers and business leaders at Deutsche’s European Leveraged Finance conference and found that 46% of respondents thought helicopter money was on the way.

Reid said at the time: “I can only see the clamour for helicopter money increasing further from here. When the next recession hits it’s likely to be seen as the next major policy response.”

The latest fall in bond yields, following the Brexit decision, has seen pension-scheme and insurance-company liabilities rocket. Monetary stimuli have not, as yet, stimulated European economies. The US is growing, but progress is slowing. Eddie Perkin, chief equity investment officer at Eaton Vance, argued in a strategy note published at the start of July that US companies were failing to invest sufficient money to regenerate their economy.

In a note published earlier in 2016, Abdallah Nauphal, chief executive of Insight Investment, said: “We are reaching the limits of monetary policy. In all likelihood, interest rates will head further into negative territory. When that fails, the likely conclusion will be that a combination of fiscal and monetary policy will be necessary. Because many governments are running high debt levels, this fiscal expansion is likely to be monetised.”

UK business secretary Sajid Javid has suggested the UK should commit to a £100 billion fund to finance infrastructure with the private sector. Reid says this could set the scene for an injection of cash from money printing: “Maybe Brexit is a perfect excuse for a U-turn.”

The term “helicopter money” was coined by American economist Milton Friedman, who talked of using a “helicopter drop” of money into the economy to fight deflation. Former US Federal Reserve chairman Ben Bernanke earned the nickname “Helicopter Ben” after expressing interest in the policy of printing money to pay down government debt.

However, the Bank of England is wary of losing control of the monetary supply, and stoking future problems, including high levels of inflation, by pumping out helicopter money.

In April, Bank of England Governor Mark Carney told the House of Lords: “I am not a believer in the concept. I could give a series of reasons, but I will stick to a purely economic one. In effect, what is being asked is that a central bank cancels the debt that is purchased from the government in order to make this truly, if you will, helicopter money. In doing so, the bank puts a hole in its balance sheet and moves into negative equity. In order for that stimulus to be there in perpetuity it has to hold negative equity for ever.”

He said problems would develop when stimulus was removed: “We would not have an asset on the other side to meet that liability, and the only way we could meet that liability would be by creating more of that liability, and so you would end up in a compounding Ponzi scheme, which exacerbates things. There is no way of structuring around that.”

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