Helicopter Money and Debt Jubilees

Steve Saretsky -

It has been fascinating to watch the Governments response to combatting the pandemic from an economic perspective. Remember, in Q2 2020, at the onset of the pandemic, labour income declined by $20B. However, government transfers not only plugged the hole in the leaking ship, they went above and beyond that. Government transfers to households grew by over $70B. In other words, government income support programs paid out $3 for every $1 in lost income in that quarter.

While the policy response was certainly necessary, there’s been a lot of discussion about paying it back, and the possible moral hazards of essentially handing out free money. Ironically, we just found out this week that 30,000 Canadians will be able to keep $240 million in Canada Emergency Response Benefits despite originally being ineligible for the money.

According to the National Post, the government has decided to forgive the debt of all self-employed Canadians who claimed an average $8,000 in CERB overpayments — worth a total of $240 million. The claimants did not meet the benefit’s eligibility criteria due to confusing government messaging.
But of those people, roughly 6,500 already voluntarily reimbursed the government. In those cases, the government will take the unusual step of sending them back about $52 million in total CERB payments they weren’t qualified for in the first place, so long as they meet all other eligibility criteria. The agency said the process to apply for reimbursement will be released “soon.”

I think what’s important here is to understand the extent policy makers are willing to go in order to maintain the existing financial system. We have entered a new paradigm where deficits no longer matter, and all spending can be financed via the central bank. The example above, in which the government is not asking ineligible claimants to return their CERB cheques is what economists refer to as “helicopter money”. It’s essentially a metaphor for governments showering the public with free money from above.

What does this do to the value, or rather the faith in the value of said currency? After all, fiat currency is not backed by anything but faith. People believe if they work hard for the currency that it will hold its value and they can trade it for something else, like a house.

Yet here we are, house prices are surging, up 23% nationally from a year ago. While houses are meant to be lived in, they are also deemed hard assets, a hedge against currency debasement. So while house prices certainly look inflated, they are ultimately doing their job and acting as a store of value in an era of helicopter money.

When governments and central bankers get serious about removing the punch bowl, then it will be time to worry again. Helicopter money and debt jubilees suddenly aren’t that farfetched.

Three Things I’m Watching:

1. Estimates from Stats Canada suggest up to one quarter of hours worked could be remote after the health crisis ends. (Source: Bloomberg)

2. Toronto investment condos purchased in Q1 2021 are losing an average of $669 per month according to research from Realosophy & Urbanation. (Source: Realosophy)

3. The number of completed and unsold new multi-family homes across Metro Vancouver dropped by 15% compared to the previous quarter, and 32% year-over-year. (Source: Urban Analytics)

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The Saretsky Report. December 2022