Over the course of July, equities shrugged off their Brexit inspired swoon, with the MSCI World Index gaining just over 4%, largely upon the perception that central banks would act to offset any economic impact of the UK decision. The Canadian dollar fell modestly against its US counterpart, and the yield on the US 30-year treasury fell 10 basis points.

While it is generally accepted that the various programs of Quantitative Easing (QE) – injecting cash into the economy by buying bonds – carried out by Central Banks have been successful in terms of supporting the economy, it’s also apparent that they haven’t delivered the boost to growth and inflation some of their more enthusiastic advocates hoped for. Likewise, the move to impose negative interest rates seems to some extent to have been counterproductive thus far, due to the negative impact on commercial bank profitability. Obviously believers in the maxim “if at first you don’t succeed”, many opinion leaders are now advocating even more out-of-the-box policies- particularly the concept of ‘helicopter money’.

While it creates a fantastic mental image, helicopter money is actually a metaphor put forward by economist Milton Friedman and popularised in a 2002 speech by Ben Bernanke when he was a Fed Governor. The basic concept is that if the central bank created money and gave it to the government, which in turn used it to invest in infrastructure, say, or cut taxes, the resulting boost to aggregate demand in the economy would stimulate growth. While this sounds in effect the same as QE, there is a crucial difference. In a QE program, the central bank is exchanging one asset (cash) for another (bonds issued by the government). The government still has to repay those bonds, albeit now to the central bank rather than the previous private sector holder. While the mechanics could take several forms, a program of helicopter money would effectively supply fresh cash to the economy but with no corresponding government liability. From the perspective of the private sector, QE leaves their net assets the same but alters the mix; helicopter money on the other hand serves to increase their net assets.

On paper this sounds like a good idea- public spending and a boost to people’s incomes should have a stronger direct economic impact than relying on some spill over from higher asset prices arising from QE. Likewise the absence of incremental government borrowing reduces the risk of upward pressure on interest rates. However as is always the case there are a number of significant potential pitfalls (setting aside questions of the legality of such action). The credibility of central banks lies to a large degree on their independence from the government, and a perception that they are in reality subject to political influence could therefore threaten the effectiveness of future actions. Short term success in stimulating the economy could also take government focus off attempts to enact more difficult longer term reforms. Finally, the achievable boost to demand is debatable if any increase in household income is perceived to be one-off in nature- for this reason spending on infrastructure and so forth is preferable to a one off transfer payment to members of the public.

Overall it is likely that the risks to central bank credibility will prevent a wholehearted adoption of helicopter money. Certainly the Bank of Japan, considered by some the most likely candidate to put it into practice, recently disappointed markets with their failure to do so. That said the temptation is there and will intensify should the current underwhelming growth trends persist. Overall we return to the sentiment expressed in last month’s note- the importance of selectively investing in companies with underlying business characteristics that give them control over their own destinies.