Handouts, Helicopters, Hong Kong Dollars, and Hogwash

currency board fiscal policy helicopter money Hong Kong monetary policy

 currency board fiscal policy helicopter money Hong Kong monetary policyThis morning, upon logging in to my Twitter account, I found it brimming with reports that the Hong Kong government was about to embark upon an unprecedented experiment with helicopter money. "Helicopter Money is Here," blurts an FT Alphaville headline. "Hong Kong Embraces Helicopter Money," says Zero Hedge. The foreign press has also chimed in: "Helicopter Money Comincia a Hong Kong," writes Italian financial journalist Maurizio Blondet.

In typically understated fashion, Zero Hedge's report concludes thus:

So Hong Kong is about to unleash the mother of all stagflations on its people—who were already on the brink of massive social unrest before the virus forced lockdowns. Supply chains have collapsed, therefore there is no supply of goods or services, but demand is about to soar (thanks to free money drops from the government)…What happens to prices we wonder?

To which the correct answer is, "not much"—nothing, at any rate, that can be blamed on exceptional additions to Hong Kong's money stock. Why not? Because Hong Kong's plan doesn't actually involve any extra growth in the supply of Hong Kong dollars. That is, Hong Kong isn't planning to resort to helicopter money at all. Nor does its plan even come close.

Been There, Done That

This isn't to say that the Hong Kong government isn't planning to give away money. According to the more sober FT piece, under the proposed plan

Hong Kong permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion (US$15 billion) relief deal rolled out by the government to ease the burden on individuals and companies, while saving jobs.

So far so good. But what the FT fails to note is, first, that such handouts are nothing new, and, second and more importantly, that fiscal handouts aren't the same thing as helicopter money.

Concerning the first point, far from being unprecedented, the current Hong Kong plan will be the fourth such handout there. The first was 2011's  "Scheme $6,000," by which the Hong Kong government gave every permanent Hong Kong resident over 18 years of age that many Hong Kong dollars. The second took place in 2018, and involved handouts of up to HK$4000, while the third, with handouts twice as big as those of the previous year, was announced last summer. So the only unprecedented thing about the current plan is its scale, and even that change is far from sensational.


But the second point is more important. "Helicopter money" isn't just another name for government handouts, whether they're distributed by whirlybirds or not. It refers to handouts financed by new money creation rather than by either taxes or bond-financed deficits. As "Helicopter Ben" himself puts it, a “'helicopter drop' of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock."

So, is Hong Kong planning to finance its latest handouts by printing money? No. Nor is it planning to finance them by borrowing more. Instead, it's financing them the same way it financed those earlier handouts: with tax revenues. Specifically, it plans to finance them by drawing upon its substantial "fiscal reserve" of HK$1.1 trillion.

Hong Kong's government is lucky enough, you see, to routinely take in tax revenues exceeding its expenditures. The difference—its annual fiscal surplus—funds its "fiscal reserve," which is, in essence, funds it sets aside for a rainy day.  That reserve of set-aside tax revenues allows the Hong Kong government to run an occasional deficit without having to either borrow more or print money. With the handout it's planning for this year, it expects to run a deficit of $139 billion, or less than 13 percent of its reserves. That is, it might give away almost ten times as much and still avoid having to either borrow or print money.

A Currency-Board Twist

Some Twitter commentators wondered whether Hong Kong's unusual currency system would itself prevent it from resorting to any genuine helicopter money plan. They wonder because the Hong Kong Monetary Authority (HKMA for short), instead of being a central bank, is a currency-board of sorts.

In an orthodox currency board, domestic currency is linked to some foreign "host" currency by a fixed exchange rate, and backed 100 percent by host-currency assets. Growth in the money stock is in turn geared to the domestic economy's net receipts of host currency, and hence to its balance of trade surplus with the host country. In short, there's no such thing as discretionary monetary policy, let alone opportunities for radical monetary policy experiments like helicopter money drops. The Hong Kong dollar is fixed to the U.S. dollar at a rate of about $7.8 to $US1. And like any currency board the HKMA is not allowed to issue Hong Kong dollar notes that are not fully backed by equivalent U.S. dollar assets. So it might appear that Hong Kong couldn't resort to helicopter money even if it wanted to.

Only the appearance is deceiving, because the workings I just described are those of an orthodox currency board; and Hong Kong's "currency board of sorts" is far from orthodox. That's mainly because, instead of holding U.S. dollar assets just equal to an equivalent value in outstanding HKD banknotes, the Hong Kong Monetary Authority's "Exchange Fund," which manages its currency issues and manages its asset portfolio, has for some time now held U.S. dollar reserves far in excess of the value of Hong Kong's currency stock. At latest count, they amounted to US$440.6 billion dollars, or about seven times the value of outstanding HKD banknotes! It follows that, if the government let it, the HKMA could easily finance this year's planned handout by just creating a like value of banknotes (or, more accurately, "certificates of indebtedness" that the HKMA awards to Hong Kong's currency-issuing banks in order to allow them to issue notes) without violating the 100 percent reserve requirement.

Instead, the HKMA will almost certainly sell some foreign assets on behalf of the Hong Kong government, crediting it's HKD accounts at the HKMA or elsewhere in the banking system. Adult HK citizens can then apply to the government for payment of the $10,000 to which each is entitled, receiving it mainly in the shape of a credit to their individual bank accounts. In this way, the government's handout will have no effect whatsoever on the supply of Hong Kong dollars.*


To conclude: Far from being created "out of thin air," to be given away, Hong Kong's planned cash handouts have already been paid for, in full, by its taxpayers—and with plenty to spare. The handouts are nothing more than a government income-redistribution scheme, with no monetary policy implications whatsoever. Those looking for a test of the theory of helicopter money, or for an outbreak of Hong Kong hyperinflation, will have to wait longer for them. With a little luck, they'll wait forever.


*[Note added 3/2/2020.] Here is how Joseph Yam, the HKMA's first chief executive, explained the handling of government disbursements from the fiscal reserve in 2001:

If it is considered appropriate that some of the HK$430 billion of fiscal reserves should be used to address the needs of the community, then the necessary amounts can, at any time, be withdrawn from the Exchange Fund. The HKMA, having responsibility for the day-to-day management of the Exchange Fund, will have to come up with the money. We can sell some of the foreign currency assets in the Exchange Fund for the Hong Kong dollars needed for the purpose, in which case the amount of foreign reserves held in the Exchange Fund, and the size of the Fund itself, will fall. Alternatively, if there are Hong Kong dollar assets in the Exchange Fund that can be deployed, these could be used, again involving a fall in the size of the Exchange Fund. And if, for monetary or other reasons, both are considered not desirable or not cost-effective, we could borrow Hong Kong dollars in the market to fund the repayment. In this case, there would be a change in the composition of the liabilities of the Exchange Fund and no change in its assets [my emphasis].


  1. Great reading, as always. Thank you for the details and nuance.
    Still, one feels that Free Banking aka Relicopter Money is graciously yielding space to something else. After all, if we are going to have Belicopter Money for, let’s say, “The Space Force”, maybe populists on both sides of the aisle agree on a Congressional Mandate to build helipads at the 12 Federal Reserve Banks.

  2. All I hear is Hongkongers chanting and celebrating in the streets.
    Many are already using the handout to stockpile on their preferred anti-viral, Corona Extra (6-pack).

  3. I would like to see George Selgin address Stanley Fischer's idea for a Federal Reserve that is independently armed with the power to finance fiscal outlays, that is money-financed fiscal programs. I think Stanley Fischer is right, and he is certainly an authority on the topic.

    1. Can you share the source in which Mr. Fischer takes this position? It is not consistent with what I understand his views to be.

    2. Can you share the source in which Mr. Fischer takes this position? It is not consistent with what I understand his views to be.

        1. Read it. It doesn't at all call for having the Fed undertake fiscal policy directly. It calls for a special facility that would operate only under certain conditions, and set-up through formal agreement and cooperation with the government. The paper is in fact concerned with coordinating fiscal and monetary policy in a way that avoids the sort of abuse my book is concerned with. That doesn't surprise me, as I knew Fischer himself, whom I quote in the book, to be particularly concerned with avoiding such abuse.

          1. Oh, I agree, as a former central banker, Fischer was very (very!) concerned with retaining an independent Fed. And, he wants limitations on the use of the special facility (similarly Adair Turner calls for "helicopter drops on a leash"). You can't have those wastrels in the White House or Congress running wild.

            But the fact remains Fischer has edged into the zone of endorsing helicopter drops, what with guardrails and Fed independence.

            As for me, I remember when Mr. Great Recession of 2008 set one foot into the economy house…but the FOMC kept jibber-jabbering about the Inflation Boogeyman who might show up at the threshold.

            When Mr. Great Recession clomped into the house and sat down at the dinner table, and begun gorging himself…some FOMC members said he could not be evicted as that might invite the still-invisible Inflation Boogymen in.

            I should want an independent Fed? Really?

            But in any event, adding money-financed fiscal programs to the Federal Reserve's arsenal is an idea accepted by Stanley Fischer, yes, with conditions. Hey, macroeconomics will make progress, one slow step at a time…..

          2. Agree. My goodness, those wastrels in the WH, like Treasury Secretaries Hank Paulson, Tim Geithner, and Steven Mnuchin. If we could only have conservatives in that position, like those incubated at Goldman Sachs, Citi, and the FRBNY !
            And what can we say about our Senate Committee on Banking. My proposal is full cloning of Sen Mike Crapo. We need all 25 members to be Crapos. Imagine the Senate Banking Committee full of Mikes !

    3. Can you share the source in which Mr. Fischer takes this position? It is not consistent with what I understand his views to be.

  4. I agree with the statement that helicopter money normally refers to 'handouts financed by new money creation rather than by either taxes or bond-financed deficits' and that under this definition the recent HK policy doesn't count.

    Would you agree though that the effectiveness of the policy (measured in the change it induces in NGDP) is derived almost entirely from the change in the size of the current budget deficit/surplus and that this effectiveness is independent of whether this change in deficit/surplus comes from printing new money or from drawing on stocks of surplus tax revenue (or foreign currency reserves) accumulated in the past ?

    I hope I haven't been reading too many MMT blog posts recently but I'm wondering what (while clearly being a sign of the strength of the HK economy and the fiscal prudence of its government) the stock of HK dollars accumulated from previous budget surpluses actually benefits it in terms of anything real as any attempt to spend (or give away) these surpluses will have a very similar effect to the same spending/gifting financed by printing new money.

    1. There's no question that the handout can and probably will have a stimulus (spending) effect–as any increase in government spending can, holding the money stock unchanged. So my point isn't to deny the merit of Hong Kong's decision, as a stimulus effort or otherwise. It's merely to clarify the policy's non-monetary nature.

  5. If I ever have to much time on my hands, I plan to start a parallel zero hedge that just goes over their blog posts and evaluates their predictions with, say, a two year lag.

    They always predict terrible crashes.

  6. Excellent discussion by Selgin. Indeed, 'new' money creation can only arise from the Fed trading greenbacks for toxic paper such as happened during 2008 onwards, during the ' bank bailouts' (actually I thought of another way, which is the interest paid on Treasury debt, but it's not worth mentioning since so small at the moment).

    So what to make of the Fed Reserve balance sheet expansion from $0.9 T before 2008 to $4.2T today? Well, if you believe economists, it doesn't have any bearing and is not even counted in official "Debt-to-GDP" figures. It figures, because it's some version of "we owe it to ourselves" or other such Ricardo Equivalence nonsense. I say the chickens come home to roost, and after the next recession (happening now) the bloated Fed balance sheet will push the USA into 200% Debt-to-GDP territory, with concomitant hyperinflation or default. Concomitant. Haven't used that word in a while.

  7. "Far from being created "out of thin air," to be given away, Hong Kong's planned cash handouts have already been paid for, in full, by its taxpayers—and with plenty to spare. "

    Sounds like the Fiscal Theory of the Price Level, which sounds like the Backing Theory of Money.

    1. No one denies that expansionary fiscal policy can raise prices. But it's a long way from there to the FTPL!

      1. I also believe that it is far from the FTPL. I agree that the planned cash handouts are not helicopter money either — more like a shift of government deposits held at the banking system into non-bank public's deposits. Given the high level of liquidity of the Hong Kong banking system as well as the openness of the local economy, the impact of this policy on the money supply, aggregate activities and prices is expected to be insignificant in magnitude. The policy is more to do with politics than economics — to buy votes in the Legislative Council election this coming September.

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