Mohamed El-Erian, the former chief executive of Pimco, has warned that helicopter money – a fiscal policy of last resort for central banks involving printing money and handing it out directly to people – is “politically very dangerous”.
Speaking at a London event to promote his new book The Only Game in Town on March 15, the chief economic adviser to German insurer Allianz also argued that from an investment standpoint, macro uncertainties are making cash an increasingly important asset class in its own right, rather than a way to sit on the sidelines during tough times for major asset classes.
A Bank of America Merrill Lynch fund manager survey published on March 15 found that cash now accounts for 5.1% of fund managers’ portfolios. The previous month, this had stood at a 15-year year high at 5.6%.
But El-Erian said: “Having up to 30% cash in my strategic asset allocation is not idiotic, that is a massive departure from conventional wisdom. Why? Because cash is viewed as a dead asset.
“But if you look at why, you need resilience, optionality and agility, cash has an increasingly important role.”
While traditional quantitative easing has been widely used since the financial crisis and involves central banks creating money to buy financial assets, helicopter money, also referred to as people’s quantitative easing and an option increasingly cited as a solution to the developed world’s sluggish growth, aims to provide a shot in the arm to consumer demand, with the money either distributed as a lump sum cash deposit or as spending vouchers.
Percival Stanion, vice chairman of Pictet Asset Management, argued earlier in March that helicopter drops will be “ultimately what central banks have to do”, albeit not for two years or more.
But El-Erian, who is also the chair of US President Barack Obama’s global development council, said that such a move would hand central banks too much political influence, while at the same time meeting with scepticism from the public.
El-Erian conceded central banks’ fiscal tools are proving ineffective, but warned of the risks of resorting to helicopter money: “People’s QE is a huge step for central banks to take because it’s politically very dangerous. You stop being a quasi-fiscal and become a fiscal entity without the need to go to parliament for approval and that’s something politicians won’t be very comfortable with.
“We have to be careful, it’s not a slam dunk [as a solution]. The biggest risk is the political autonomy of central banks.”
In 1999, the Japanese government instigated its own version of people’s QE, by distributing shopping vouchers to families and the elderly in a bid to stimulate spending. El-Erian argued people viewed this as an “extreme political move” and instead of spending the vouchers, resorted to trading the coupons for money.