Why Helicopter Money Is Inflationary - YouTube

Welcome back my people,  I'm your host Aida Yoguely.

Today you’ll be learning about two methods central  bank’s use to manage the supply of money, i.e.  

the 2 “Money Printers”. Plus, I’ll show you  which “Money Printer” is the most inflationary:  

Helicopter Money or Quantitative Easing.

Money Supply in United States Today Before we begin, you must be wondering,

what is the money supply  in the United States today?

Well you are in luck. Here is how to  see exactly how much cash has been  

put into circulation. Just go to one of  my favorite websites for economic data,  

and a prime source for many investors and  traders, the Federal Reserve Bank of St. Louis.

What is the M2 Money Supply?

So this is the chart of M2  money stock which measures  

the money supply that is in savings deposits  

and the money located in funds that are easily  convertible to cash such as money market funds.

The X-axis shows the years from 1960 to 2021, and  the Y-axis shows the amount of cash in billions  

of dollars. As we can see it has been going  up slow and steadily in the past and recently  

is has took off almost exponentially. Since  1959, the money supply has gone up over 7000%.

And since the year 2020, the Fed managed  to increase the money supply in savings  

deposits and money market funds by 34%. So  that $100 bill you were holding can only  

purchase $74 worth of stuff. Your purchasing  power got crushed by the Fed’s printing press,  

or more like the push of a button. The Federal Reserve has many tools for  

Monetary policy, i.e. “printing” more money. And  boy did they use all the tools they could in 2020.  

But today we’ll go over 2 of them:  Helicopter Money, and Quantitative Easing.

Helicopter Money During the past year,  

the government forced certain sectors to  stop operating, which caused an economic  

slowdown. To remediate this, the Fed pushed  interest rates down and currently near 0%.

Yet the Fed wanted to provide even more even more  monetary inflation to stimulate spending and hence  

restart economic activity. So, to continue to  mitigate the economic impact of the closures,  

the government distributed helicopter money.

What is helicopter money?

Helicopter money where by the central banks  simply created money out of thin air and  

directly handed it over to the population. Kind  of like an air-drop. This is the second tool,  

other than pushing interest rates down,  that they used to increase the money supply.

Helicopter Money Chart

You can see the history of the  helicopter money distributed to people  

here, in this chart of Federal government current  transfer payments to people. In the X-Axis  

we got the timeline from 1950’s to now, and in the  Y-Axis the amount of cash in billions of dollars.

First thing to note is that the amount  of cash has been steadily increasing  

every quarter over the past 70 years. And this  makes sense because this money is for things like  

unemployment benefits which needs to  increase to keep pace with inflation.  

Benefits back in the day would not be  enough to afford the same things today.

Secondly, in the global financial crisis of 2008  

there was a bit more helicopter  money than ordinarily.

Last thing I’d like you to note is that in  2020 the helicopter money really spiked.  

Zooming in, there is the first stimulus  in 2020 quarter 2 of 4.7 trillion dollars,  

then there is the second stimulus in 2021 quarter  1 of 5 trillion dollars. And finally there should  

be a third stimulus in quarter 3 but this  chart has a data delay so it ends at quarter 2.

Ok so up till now you know how to see the  increase in the money supply over time  

and the distributions of helicopter money over  time. Let’s learn about Quantitative Easing. 

Quantitative Easing So even with all this fresh new  

green, the Fed still opted to use their third  

Monetary Policy tool, quantitative  easing, also known as QE for short.

What is quantitative easing?

QE means the Fed is purchasing government  bonds and other financial assets.  

The Fed essentially injects money into the  economy by buying assets. And as you may know  

from the laws of supply and demand,  this high demand by the Fed for assets  

pushes the prices high. So this is a way  to save bonds from crashing too much.

The Fed has no upper limit to QE so up to  today, it continues to purchase assets.

How much in assets has the  Fed purchased over the years?

Let’s take a look at the Total Assets chart,  which displays the total value of the assets  

of all Federal Reserve Banks as reported  in the Fed’s weekly balance sheet.

In 2002, the Fed was holding 719  billions of dollars in assets.  

In 2008, over the span of 3 months from September  to November the Fed tripled their assets to 2.1  

trillion dollars. And now since March of 2020,  the Fed has doubled their assets to 8.4 trillion  

dollars. And they are continuing QE, purchasing  more assets quite linearly on a weekly basis.

Which is More Inflationary, Helicopter  Money or Quantitative Easing?

The crazy things about all these  ways to pump up the money supply  

is that some are more inflationary  than others. To illustrate this,  

let’s superimpose all the plots  together and look for patterns.

So here you can see the M2 Money Stock in blue,  

which is basically the money supply; Assets  are in red, which is quantitative easing,  

the value of the financial assets purchased  by the Fed; and lastly in green are all  

the transfer payments from the government  directly to the people, the helicopter money.

From 2006 to 2021, whenever quantitative  easing has taken place, there has been a  

bump up in the money supply. Notably here in  2008, 2012, 2014, and 2020. Note that the amount  

of cash that went into the money supply was far  less than released via QE. So where did the rest  

of the money go? A lot of that money went to the  securities markets when then bonds were purchased.

Also notice that when the Fed decreased  the Quantitative Easing in 2019,  

by selling those assets, it also  took money out of the circulation.

Now take a look at the helicopter money in  green, those also coincides with a bump in  

M2 money stock. But look at 2020, when trillions  of dollars in of helicopter money was air dropped.  

That cash went straight into  people’s savings accounts.

So quantitative easing, security purchases  by the Fed, mostly goes towards inflating  

the securities markets. Which makes  owners of those securities richer.

While the direct payments from helicopter  money inflates the money supply. In  

other words it directly decreases your  purchasing power for goods and services.

So to summarize, which monetary  policy is most inflationary,  

Helicopter Money or Quantitative Easing?

Helicopter money is by far one  of the most inflationary methods  

of monetary policy because it goes  directly and rapidly into people’s  

pockets and boosts demand in assets  regardless of whether that purchase  

increases productivity. Helicopter money is  more inflationary than quantitative easing.

Think back to when people got their stimulus  checks were bidding up prices of bicycles and  

video cards. Heck if there was something  you liked, now you could buy more of it.

And that is how things with fixed prices  

quickly went out of stock. The price wasn’t high  enough. It’s the basics of supply and demand.

If you were wondering,

How inflationary are drops in interest rates?

Think of it this way.  

With easy credit, the bank is deciding to lend the  money to someone. That person who borrowed money  

has to pay it back, with interest. So they need  to put that money to work in a productive way  

that yields earnings enough to cover the  interest payment and ideally makes a profit.

There will be people who don’t succeed in  making a profit, like those who miss timed  

a speculative bubble. Others that might  not even be able to pay back the loan,  

perhaps people who didn’t make good  business decisions. And then there are  

people that actually put the borrowed money into  productive work, and hence moved the economy.

I’m Aida Yoguely. Thanks for learning with me  

today. And I’ll see you again in  the next one. That's all folks.