PARIS — Deflation can be solved in one fell swoop: All you have to do is drop money from a helicopter.

U.S. economist Milton Friedman came up with the drastic concept in the 1960s, before it was revived in 2002 in a landmark speech by Ben Bernanke, four years before he became Chairman of the Federal Reserve.

The idea was to give money directly to households in order to stimulate consumption and, consequently, revive inflation. The strategy bypasses the traditional — and ineffective — channel of monetary policy: bank credit. But in the arsenal of weapons at the disposal of central banks, this is definitely the nuclear option.

In 2016, back when the monetary union was on the brink of deflation, European Central Bank President Mario Draghi called Friedman's theory "interesting." Three years later, the question is whether the ECB's new monetary policy measures will have a significant impact on economic activity. If they don't, then the idea dropping banknotes from a helicopter (or more likely, sending an ECB check to every household in the eurozone) could make a comeback.

There's an ideological block.

Stanislas Jourdan, director of the NGO Positive Money, which advocates this form of economic recovery, believes that to be effective, we should be handing out the equivalent of 3% of the eurozone's GDP — roughly 1,000 euros, in other words — to every adult. He acknowledges, however, that there's an "ideological block" among policymakers who, in his words, "subscribe to monetarist dogma and are thus afraid of a hypothetical hyperinflation."

Indeed, it is unlikely that the Germans, marked as they are by the hyperinflation of the early 1920s, will be seduced by such a monetary innovation. And yet, as Pictet Wealth Management strategist Frederik Ducrozet explains: "Nothing in the mandate of the ECB prohibits the direct financing of households."

There's also the possibility of a happy medium between buying government debt and the "helicopter money" solution. The ECB could lend large amounts of long-term maturity money to banks, with rates close to zero or even negative. In fact, it is already doing this through targeted longer-term refinancing operations (TLTROs).

This time around, however, the ECB could put conditions before banks can access these loans. Banks should commit to lending directly to households at very low rates — or pay penalties. That would certainly make for a more presentable solution than dropping suitcases full of money from a helicopter.

Still, for Ducrozet, "the best and most democratic solution is not ‘helicopter money,' but a coordinated fiscal stimulus for the European states that can afford it — it's the most realistic option."


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