This is from an article by Sheldon Richman in the American Conservative:
But the Austrian school of economic s has long stressed two overlooked aspects of inflation. First, the new money enters the economy at specific points, rather than being distributed evenly through the textbook “helicopter effect.” Second, money is non-neutral.
Since Fed-created money reaches particular privileged interests before it filters through the economy, early recipients—banks, securities dealers, government contractors—have the benefit of increased purchasing power before prices rise.
The second assertion is odd, as the non-neutrality of money is probably the single most heavily researched question in all of macroeconomics. So I am not quite sure why Richman considers it “overlooked.”
The other point is mostly inaccurate. Consider the following four monetary policy injections, where fiscal policy is held constant in each case.
1. Newly injected base money is used to buy T-bonds from banks.
2. Newly injected base money is used to buy T-bonds from non-bank securities dealers.
3. Newly injected base money is used to buy T-bonds from individuals at a special auction excluding bond dealers.
4. Newly inject base money is used to pay the salaries of government workers, and as a result less money is borrowed by the Treasury. The Treasury then creates and donates a T-bond to the Fed.
In all four cases the increase in the amount of base money is identical. In all four cases within about one week the increase in currency held by the public and bank reserves is virtually identical. In all four cases the impact on debt held by the public is identical. Thus the impact on interest rates is virtually identical in each case. In all four cases the impact on the purchasing power of various groups in society is virtually identical. Bonds are purchased at market prices. It simply doesn’t matter how the money is injected, if we assume a pure monetary policy with no change in fiscal policy. Of course a “helicopter drop” is also a fiscal expansion, and hence would produce slightly different results.
I don’t know if this is what the Austrians actually believe, but Richman seems to be assuming that OMOs are gifts of purchasing power from the Fed to the recipients. That is not true, the newly injected cash is sold at market prices, in exchange for Treasury debt.
This is similar to a mistake many commenters make, wanting to distinguish between cash injected into the “real economy” and cash injected into financial markets. Cash doesn’t go into markets at all, it goes into the pockets of people and businesses. There is no meaningful distinction between cash going into the “real economy” and the “nominal economy.” If the Fed buys a bond from a dealer, he’ll quickly deposit the funds in the bank. If the Fed injects cash by paying Federal salaries in cash, the workers will quickly deposit the cash into banks. Over time the demand for cash will rise as NGDP rises. I suppose one could distinguish between cash boosting RGDP and cash boosting NGDP but not boosting RGDP. But then commenters would want to talk about the slope of the SRAS curve, not who gets the money. Or you could talk about cash injections failing to boost NGDP, because the extra money is hoarded. Yes, but once again that depends on factors that have nothing to do with who gets the money, as long as we assume fiscal policy is unaffected.
PS. The article is entitled “How the Rich Rule” and is by Richman. Cute.
PPS. Helicopter drops of cash never occur in the real world.