Anyone who has kept close tabs on recent developments in the financial sector will be familiar with the concept of helicopter money. Albeit this is not a long-term solution, it appears that New Zealand officials want to explore this option to boost the domestic economy as well.
New Zealand Needs a Stimulus
Various countries around the globe have begun issuing their own stimulus packages over the past few months. The biggest example is America’s Federal Reserve, which saw its balance sheet reach $7 trillion in very quick succession.
Japan, on the other hand, only recently announced very similar plans. Thankfully, its domestic stimulus package is much smaller, although it appears that billions of dollars in currency will be strewn around the economy like it is free candy. Creating money out of thin air, known as helicopter money, will not serve as a long-term solution for anyone involved.
Keeping all of this in mind, it becomes even more interesting to see New Zealand mull the option of helicopter money. Distributing free cash as a stimulus to boost the economy is a solid option, in theory. Increasing liquidity always comes at a cost, and this particular cost should neither be underestimated nor ignored.
For now, there are very few details known about these discussions. One option is to have the central bank print more money and distribute it accordingly. Option 2 is to have the government increase its borrowing and handing out money accordingly. Both options will have problematic effects on the domestic economy in the long run if the numbers aren’t kept in check.
While it is true that COVID-19 has created havoc among economies worldwide, there have to be better solutions than printing money out of thin air. Dumping cash onto an economy will ultimately lead to inflation. How high that rate of inflation will be, is impossible to predict in advance.
New Zealand has no Gold Reserves
Whereas other countries may be able to offset long-term inflation through the buying of assets such as precious metals, New Zealand seemingly doesn’t have that option. According to statistics provided by CEIC Data, New Zealand has zero gold reserves as of May 11, 2020.
One has to wonder how the extra printed money will be given value ten. Linking it to foreign currency reserves is one option, as those sit near US$22 billion as of right now.
All of it will come down to how much helicopter money will be brought in circulation and how the government determines to handle all individual aspects of going down this path.