Governments have used various ways to stimulate economies since the global crisis of 2008, and many economists are talking up helicopter money as the next instrument to boost growth. Not all agree, and some aviation insiders remain sceptical. 

A state of feverish anxiety could be felt in the financial markets as the northern hemisphere summer came to a close.

Investors were frantically trying to assess what governments and central banks would do to spark demand and restore growth when European bankers returned to their desks.

Almost a decade on from the 2008 financial crisis, and numerous bouts of monetary stimulus, the global economy remains fragile and at risk of another recession.

It should come as no surprise then that various economic circles are showing interest in unconventional forms of Keynesian policies, particularly helicopter money, which can take various forms to spur growth and boost inflation through the permanent monetisation of government debt.

American economist Milton Friedman first used the metaphor in 1969 in a research paper to describe how the US government could lift its economy out of a slump by dropping dollar bills out of the sky to trigger a cycle of consumption.

The idea was also mooted by former US Federal Reserve chairman Ben Bernanke in a 2002 speech to support his theory about how central banks could combat deflation through monetary-financed tax cuts. That is also how he earned the nickname, Helicopter Ben.

To what extent helicopter money could impact the aviation finance market, which is enjoying a steady flow of cheap liquidity, is anybody’s guess. Until now, it has been considered more of an academic theory discussed around dinner tables rather than a viable monetary strategy.

 Stall speed

The Bank of Japan (BoJ) is due to review its monetary stimulus programme in September, but analysts anticipate it could adopt some form of helicopter money because the economy has been dogged by deflation for nearly two decades. In January, the BoJ cut its deposit rate to negative territory for the first time in history.

In another bid to kick-start inflation, Japan’s prime minister, Shinzo Abe, announced in July a massive fiscal package worth more than ¥28 trillion ($275 billion).

However, the head of a leading lessor tells Airfinance Journal that after discussions with senior finance figures in Japan, it is “unclear whether there is a real opportunity for aviation financiers to access liquidity that would be made available through helicopter money... as the criteria appears very strict”.

Regardless, the lessor anticipates “more influence from Japan and other areas where negative interest rates apply” on the aviation finance sector.

He adds: “Investors, or lenders, really do focus on certain names if they have access to low-cost capital. For instance, the recent IAG deals on 787s and A330ssaw lease rate factors at or below 0.7% per month, as investors in Japan want to put money out at positive returns versus negative ones in bank deposits.

“Bottom line, there will be little impact on the general aviation market from helicopter money, but certain credits will definitely benefit from whatever cheap liquidity is out there.”

Critics say once unleashed, no matter how it is deployed, helicopter money is difficult to control and could lead to hyperinflation.

A US-based hedge fund manager agrees that the untried financial device “is worrying” but stresses “it is a necessary evil”.

He adds: “Every government is trying to stimulate its economy as the world is not moving forward. Last summer, we had Greece; this summer we had an attempted coup in Turkey, Brexit and Brazil’s economy contracted for its fifth consecutive quarter in June, not to mention the mountain of bad debt in China.”

Ultra-low interest rates are keeping defaults down, he argues, and helicopter money “will allow companies to live to fight another day”.

For the aviation finance sector, the hedge fund anticipates that liquidity will continue to be available to the sector at attractive rates.

“And, as long as have we have cheap oil, we are all merry until some other force comes around with the potential to rock funding and oil prices. Remember, we still need the Italian and Spanish banking crises to play out.”

The pressure continues. The Bank of England was forced to cut its base rate from 0.5% to 0.25% in August, a new historic low, after the UK’s vote in June to leave the European Union (EU).

As Airfinance Journal went to press, Janet Yellen, chair of the US Federal Reserve, was due to speak at an annual symposium of central bankers in Jackson Hole, Wyoming and shed some light on how the central bank, after various approaches, could better conduct its policy in this low neutral rate of interest environment. 

The latest report from the US Department of Commerce indicates the US economy grew at an annual rate of 1.2% from April to June as business cuts wiped out consumer spending. Various market analysts speculate that US policymakers could be toying with the idea of helicopter money to ignite economic activity.

The same discussions are being held in Europe. In an open letter to the European Central Bank (ECB) president, Mario Draghi, in July, 18 members of the European Parliament urged the ECB to look at helicopter money as a possible solution “to enhance economic development through direct spending into the real economy”.

ECB interest rates became negative in the summer of 2014 in a move to spur growth by prompting banks to lend, to avoid a 0.4% premium, and boost inflation. However, the move appears to be backfiring, with various Europeans banks reportedly considering the best means to store cash to avoid paying the premium, due to the ECB’s negative deposit rate for lenders.

The impact of any form of helicopter money on the aviation finance market, argues Steven Udvar-Hazy, chairman of Air Lease, “will most likely be a continuation of relatively low interest rates to stimulate investment”.

Mark Lapidus, chief executive officer of Amedeo, agrees, adding: “These macro trends will likely keep on bringing more money into leasing – it is better yield than perhaps speculative-grade corporate debt.”

Whether falling from a helicopter or not “loose money, will continue to increase aircraft deliveries relative to a more normal economy”, observes Edward Hansom, chief investment officer of Seraph Aviation Management.

Aircraft values are not inflated by historic standards based on current market values versus replacement costs, he says, adding: “But deliveries are getting near historic peaks versus the installed base. Original equipment manufacturers (OEMs) have been the real beneficiaries of loose monetary policy.”

While “such money infusions” have an impact on aircraft values, Adam Pilarski, senior vice-president and economist for Avitas, dismisses helicopter money as “being a big thing, now” that could impact the aviation finance sector.

Flight path

Like quantitative easing, the effect of helicopter money depends on the implementation strategy, says Doug Brennan chairman of Aviation Finance.

All government-sponsored monetary programmes are worrisome, he says. “They are largely unprecedented and unwinding them has never been done.”

Instead, Brennan urges governments to implement “tax rate cuts and to reform taxes in all countries, particularly corporate rates in the USA”, as a better means to return the global economy to better health.

Helicopter money does not necessarily go into the hands of households, he cautions, so the nominal effect may be limited depending on the behaviour of the consumer.

“Today, consumption is limited globally as prices decrease. Japan and the USA save and spend money very differently, and so the exact policy in different regions of the world may in fact result in different behaviours, not necessarily creating stimulus,” he says.

Brennan adds: “I still do not believe that rigging economies works, particularly when the net effect of quantitative easing on household spending is very limited. Banks have not reacted positively at the household level either, despite negative rates in the EU, for example.”

He notes the deflationary pressures have had the exact opposite effect on consumer behaviour.

“We have seen consumer confidence numbers increase ever so slightly relative to other periods in modern history and we have seen no real impact on inflation apart from a few upticks in specific countries, and those, like the USA, often get muted with global events like Brexit.”

Boeing declined to comment on helicopter money “as it is another monetary strategy” that central banks can use to manage monetary policy, adding: "We remain confident that central banks have the tools and the expertise to manage current market conditions.”

Airbus also declined to comment, saying: “Aircraft remain great investments and they are moveable. Moreover, in the world’s fastest-growing markets for air traffic, Asian financing for Asian demand for new aircraft is increasing and appropriate given the growth in the region.”

Deutsche Bank remains optimistic about helicopter money. In a research note, the bank states that the introduction of helicopter money in Europe could be a significant positive for equity markets, as it has the potential to support growth, and push up inflation expectations.

The head of a lessor notes that, although any impact of helicopter money on the aviation finance sector will be benign, it will prolong the boom times and this “makes it much more likely to overshoot the downturn and cause an even bigger crash.

He adds: “Central bank actions are suppressing volatility and distorting market signals and this is just another method to do so.”

This, combined with the fundamentals in the airline business – “airlines that are not great credits, high asset risk in widebodies, last-off-the-line risk, debt funding that doesn’t always come when you pick up the phone” – could make for a difficult environment.

But for now, Freidman’s helicopter theory remains parked in the hangar, waiting to be deployed by the first central bank that calls on it.