It makes very little difference how new money is injected

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.


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167 Responses to “It makes very little difference how new money is injected”

  1. Gravatar of Saturos Saturos
    2. December 2012 at 10:28

    Let me attempt to explain how MF would see this:

    Yes, the impact of the OMOs on financial asset-wealth is neutral, regardless of how the purchases are made. But the higher quantity of money means that the prices of consumer goods and real capital assets must now rise to a higher level.

    The Austrian sees this price rise as being a gradual “bidding up” of the price, like an auction, with the increased flow of money-spending on goods and services (via the HPE) gradually raising their prices to the new level. The demand curves for assets and commodities, in terms of money willing and able to be exchanged for them, shift outwards. Those who hold the newly created money before others do can make purchases at “disequilibrium prices” before they rise to their new level, consistent with the greater quantity of money. The excess money must slosh around the economy, bidding up prices as it goes, and its earlier possessors are unfairly enriched.

    No, they don’t understand rational expectations.

  2. Gravatar of Bill Woolsey Bill Woolsey
    2. December 2012 at 10:33

    I believe that Richmond means almost same thing by his two points. Because money enters the economy at a particular point, money is not neutral. The two points are two aspects–first, that those receiving the new money first benefit at the expense of the rest of society, and second, that the relative prices of the things they prefer rise (and the relative prices of the things other folks prefer fall,) and the composition of output shifts towards those products with higher relative prices away from those products with lower relative prices.

    Money creation and inflation redistributes wealth and impacts relative prices and the composition of output.
    \

    Of course, we can imagine that those gaining spend money just like those who are losing–only impacting who gets the enjoy the goods. Relative prices and the composition of output could be unchanged, but there remains a change in the distribution of income. Or, I suppose everyone could end up equally well off, by what they buy changes.

    The alternative would be that new money is distributed proportionately to everyone and is spent in such a way that relative prices and the composition of output are unchanged.

    The conventional questions of neutrality, especially whether aggregate real output is higher or unemployment is lower is really not at issue here.

    In my view, money is not neutral. But I agree that those, like Richman, who think that security dealers, banks, etc. especially benefit by getting the new money first are wrong.

    In our system, the government captures nearly all the benefit of inflation.

  3. Gravatar of Bill Woolsey Bill Woolsey
    2. December 2012 at 10:33

    Sorry, Richman

  4. Gravatar of David R. Henderson David R. Henderson
    2. December 2012 at 10:47

    Scott, Just so I can make sure what you’re saying: are you denying Cantillon effects?

  5. Gravatar of Morgan Warstler Morgan Warstler
    2. December 2012 at 11:08

    If the Fed pays $1 more than the next bidder would have for a T-Bill, Scott is wrong.

  6. Gravatar of dtoh dtoh
    2. December 2012 at 11:10

    Scott,
    The mechanism is important because you need to be able to explain the mechanism in order to convince skeptics that monetary policy (OMO) works at the ZLB.

    If you correctly understand the mechanism then you can make a very robust and clear argument that OMO do work at the ZLB.

    Let’s ignore hypothetical cases (e.g. helicopter drops) and focus on the real world.

    When the Fed does OMO the people who ultimately sell the securities to the Fed (not the Primary Dealers who are just intermediaries) can be pension funds, banks, businesses, high net worth individuals (HNWs), etc. They are the ones who end up with the cash. For the purpose of boosting NGDP, the ones that count are businesses and NNWs. They are the ones who have the ability to spend money on real goods and services (including capex, inventory accumulation, etc). (Pension funds etc. don’t generally invest in new factories, cars, etc).

    Businesses and HNWs don’t increase their spending on real goods and services just because they have more cash. (If the Fed were buying used cars from the middle class, it would be different…but it’s not). So describing the effect as a hot potato effect is I think confusing.

    The reason that businesses and HNWs spend more is because there is change in their preference between holding financial assets and buying real goods and services. The change can occur for one of two reasons…a) a change in the real price of financial assets (movement along the preference curve), or b) a shift of the preference curve (i.e. a change in expectations).

    The bottom line though is that if there is a change in either the real price of financial assets or in expectations, then businesses and HNWs will at the margin exchange more financial assets for real goods and services. The exchange can either occur from selling existing financial assets or issuing new ones (including new bank borrowing).

    As you say, “Over time the demand for cash will rise as NGDP rises” and this will absorb the cash. This is an important point because even though the cash is absorbed by the rise in NGDP, the actual rise in NGDP is not directly caused by the excess cash (via the hot potato effect). What is at the root of the expansion of NGDP is not the cash but the increased real price of financial assets (i.e. lower real expected returns) and the shift in expectations. These cause businesses and NNWs to spend more on real goods and services.

  7. Gravatar of Rademaker Rademaker
    2. December 2012 at 11:15

    “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.”

    Is it conceivable that there are circumstances under which the treasury debt that is taken on in this manner will never be unloaded back onto the market by the Fed? Say that some type of permanent disinflationary influence lingers in the economy (I’m mainly thinking of unproductive overhang of private debt as a result of past asset bubbles), thus causing the Fed to keep rates (short and long) relatively suppressed indefinitely into the future to counteract it, couldn’t that make treasury paper get parked on the Fed’s balance sheet in perpetuity, the interest payments on these getting recycled back to the treasury at all times as if the paper didn’t exist anymore?

    It seems to me that under such circumstances, the QE injection functions much more like a gift than it was intended to. A loan that is never expected to be repaid is equivalent to a gift.

    Is there any likelihood that the Japanese and US situation function to some extent along these lines?

  8. Gravatar of JP Koning JP Koning
    2. December 2012 at 11:19

    “Bonds are purchased at market prices.”

    What is your definition of “market price”? Without a definition it’s hard to get a good grasp on what you’re trying to say.

  9. Gravatar of dtoh dtoh
    2. December 2012 at 11:22

    And BTW, in the real world there is only way new money is injected into the economy. It’s by the Fed exchanging money for financial assets. It’ just confuses things by calling it different names such as FF rate targeting, QE, OMO, or monetary easing). Mechanically, it’s all exactly the same thing. The only thing that matters is the quantity and how the Fed communicates it’s policy objectives.

  10. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 11:22

    The principle of charity therefore demands that you try to figure out why he says this.

    Scott writes,

    “The second assertion is odd, as the non-neutrality of money is probably the single most heavily researched question in all of macroeconomics.”

    But as a matter of personality, you seem to reject the principle of charity as a default mode of engagement with others.

    Hayek models non-neutrality *differently* that all of the economists who have
    ‘researched’ non-neutrality.

    But you *reject* even entertaining the idea of letting yourself understand the possibility of this alternative way of understanding non-neutrality. It’s part of our protective belt of dogma, protecting your view of money and macro discoordination from any doubt, the way religious people protect their views by making sure not to be familiar with anything that might offer an alternative.

  11. Gravatar of ssumner ssumner
    2. December 2012 at 11:39

    Saturos, That does sound like something MF would say. If I don’t get money directly from the Fed (and I don’t), I supposedly have no ability to buy those assets that are about to go up in price. Yes, he’s clueless about ratex.

    Bill, What Richman doesn’t understand is that the reason money is not neutral is because wages and prices are sticky, it has nothing to do with who gets the money first. Whoever gets it first generally puts it in the bank.

    David. Yes.

    Morgan, That’s why I said virtually no effect. It might be a dollar here or there, but nothing significant.

    dtoh, You said;

    “When the Fed does OMO the people who ultimately sell the securities to the Fed (not the Primary Dealers who are just intermediaries) can be pension funds, banks, businesses, high net worth individuals (HNWs), etc. They are the ones who end up with the cash.”

    No they are not, just as the primary dealers are not. The insurance companies that sell the bonds immediately get rid of the cash they receive from the Fed, someone else ends up with it. Believe me, insurance companies have no interest in holding briefcases of $100 bills, and they are not allowed to hold bank reserves, ergo they don’t end up with the cash.

    I agree that in ths short run asset prices are a very important part of the monetary transmission mechanism, as is the HPE, but that observation has no bearing on anything I said in the post, as the asset price effect occurs in exactly the same way regardless of who gets the money first.

    Rademaker, You are mixing up two points. Yes, it’s possible that the money is never pulled out of circulation. But even so, it’s not a gift to the recipient, it’s seignorage to the Treasury. The Treasury essentially borrows at zero rates from the public. Money holders pay the price in the long run, by losing purchasing power relative to what they’d have if the monetary injection were not permanent. Sellers of bonds come out even, and the Treasury gains what money holders lose.

  12. Gravatar of ssumner ssumner
    2. December 2012 at 11:49

    dtoh, I agree with your second comment.

    JP, I mean the price that you or I would pay if we bought $100,000,000 in bonds.

    Greg, The “principle of charity” suggests you might want to read what I actually said:i.e. “I’m not quite sure why”, before setting off on one of your typical mindless rants. It seems that you are agreeing with me, i.e. I was not quite sure why, if what you say is correct.

    BTW, If you and your fellow Austrians want to go through life with your own private language that no one else understands, you’ll have about as much success as language purists who insist on calling happy people “gay.” Good luck.

    I notice you don’t provide an alternative definition of money non-neutrality that would make his statement correct, and I’m quite sure that’s because you are unable to do so. It’s all bluster on your part. Now I’m calling your bluff and the readers are about to see how empty your claims actually are.

  13. Gravatar of ChargerCarl ChargerCarl
    2. December 2012 at 11:59

    Great post scott. The “QE only benefits the rich/government” meme is one I see circulating everywhere. it’s frustrating to listen to.

    “and the readers are about to see how empty your claims actually are.”

    Scott, I think you should be a little more charitable to your faithful readers than that. We already know that Greg Ransom is a Class A bull****er :D

  14. Gravatar of dtoh dtoh
    2. December 2012 at 12:03

    Scott,

    You said,

    “No they are not, just as the primary dealers are not. The insurance companies that sell the bonds immediately get rid of the cash they receive from the Fed, someone else ends up with it. Believe me, insurance companies have no interest in holding briefcases of $100 bills, and they are not allowed to hold bank reserves, ergo they don’t end up with the cash.”

    I don’t disagree with you although it’s certainly possible that cash balances can be held indirectly by the insurance companies with a bank deposit that the bank then keeps as excess reserves.

    But that is not the important point. The important point is to think about who is actually in a position to impact NGDP, and this is principally economic players who can and will actually spend the money on real goods and services…. i.e. primarily businesses and HNWs.

    My point is that these players (businesses and HNWs) don’t spend more on real goods and services simply because they now have higher cash balances. The reason they do so is because there has been movement along or a shift in their preference curve between holding financial assets and spending on real goods and services.

    The thing I think that is misleading about referring to the HPE is that it makes it seems as if the excess cash is directly causing the increase in NGDP. It’s not. It’s the higher financial asset prices and the shift in expectations which causes the change in NGDP. The cash gets absorbed by higher transaction requirements caused by higher NGDP but it is not directly causing the higher NGDP, when you talk about the mechanism in terms of the HPE, it engenders all sorts of counter-arguments such as “it will only cause inflation” or “people will just hold the excess cash.” The financial asset price mechanism better describes what actually happens and makes it much easier to refute these arguments.

    As I said earlier if the Fed was buying used cars or used clothing from the middle class then you would actually have a direct HPE, but that’s not how the Fed operates.

  15. Gravatar of ssumner ssumner
    2. December 2012 at 12:25

    dtoh, If insurance companies put money in the bank, then they aren’t holding that base money any longer. Banks usually hold only a tiny amount of ERs, so that’s not an important part of the mechanism, at least during normal times. I don’t think institutions or HNW people are more important here, it is the behavior of cash holders that has the biggest impact on NGDP. Most cash holders are tax evaders, it’s their behavior that drives NGDP.

    Don’t think in terms of “more spending,” that’s a symptom. The cause is that money loses value as it’s quantity increases, for the exact same reason that apples lose value as their quantity increases. Do HNW people play a big role in the apple transmission mechanism?

  16. Gravatar of Nick Nick
    2. December 2012 at 12:38

    Presumably the market price of the assets bought by the Fed is effected by expectations of the Fed’s future actions? Isn’t that a key mechanism through which NGDP targeting would work? So just because the Fed buys at current market prices does not mean it isn’t also potentially offering a good deal to asset-holders. The deal is already priced in.

    Also, even if the fed isn’t benefiting specific asset-holders, would it be the case that it is benefiting financial asset-holders in general, as opposed to those who have fewer or no assets? Would that also be a distributive effect of sorts even if it was quite mild and justified in terms of increased output?

  17. Gravatar of Morgan Warstler Morgan Warstler
    2. December 2012 at 12:45

    Scott, so rather than argue about it, structure your plan so the SMB owners get the first dollar in….

    Futures done the right way.

  18. Gravatar of dtoh dtoh
    2. December 2012 at 12:46

    Scott,
    How do the tax evaders get the new cash. They are not counter-parties (directly or indirectly) to OMO. Someone who is a direct or indirect counter-party to the Fed’s OMO (i.e. someone who owns or can issue financial securities) has to actually exchange the money for goods and services first. In the real world this is businesses and HNWs.

    At the rates of inflation extant in U.S. in recent years, I don’t know anyone who exchanges money for real goods and services because they think the value of money will fall. Money balances are small and temporary. Expected inflation does impact expected real returns (i.e. the real price) of financial assets and this does have an impact because the holdings are both larger and longer term.

    And apples don’t lose their value if the demand increases, which is what happens to money if NGDP increases.

  19. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 13:16

    Saturos and Sumner:

    Austrians don’t fail to understand ratinonal expectations. In fact, one of Mises’ contributions to economics was a rudimentary form of rational expectations, and it was actually a tangential off-hand argument he made about inflation and wages.

    At any rate, Austrians reject the orthodox rational expectations model as it is presented today. You can argue that it is wrong for them to do that, but you can’t claim they are “clueless” about it. Not including rational expectations in one’s arguments should not be misconstrued with a failure to grasp it.

    The reason why Austrians reject rational expectations, as it is usually presented, is basically because it assumes every market participant has the same information set and same expectations concerning future prices. However, Austrian theory is grounded in individual action, and its implication of subjective values, preferences, and, importantly, subjective (dispersed) knowledge. Investors in Austrian theory do not have the same expectations of the future. There are disagreements. Mainstream economists seem to have a glimmer of this, and we see this in various models such as those that break down investors into two groups, “informed” and “uninformed”. It is, IMO, a consequence of a failure of observing investors do what rational expectations assume they do, i.e. all agree.

    Another doctrine Austrians reject is the notion that individuals can pay higher prices for goods before they receive the new money created prior. You and Saturos seem to believe that as long as individuals expectations of inflation is correct, that they will be able to set correct prices that keeps the structure of production unchanged. The reason Austrians reject this doctrine is because they hold that prices are a function of exchanges, not administered accounting abstracted from exchanges. Prices cannot be raised by the sellers of houses, say, until and unless buyers of houses devote more money in their purchases of houses. If home sellers raise their prices because they expect monetary inflation, but their buyers have not yet received any of the new money yet (since the money has only been spent and respent a few times by others prior to them), then the home sellers will experience a surplus inventory. Home sellers, if they are profit maximizers, have to sell at prices buyers are actually able to pay NOW, not in the future when the new money finally reaches their bank accounts.

    This explanation above is why so many Austrians emphasize the Cantillon Effect. It is because the mechanics of inflation is not one where everyon’s income goes up at the same time and the same rate. Inflation is a process in which it takes time for new money to “spread” throughout the economy from their initial injection points. For example, I cannot pay higher prices for the goods I buy until my income first goes up, and my income cannot go up until my employer receives more revenues with which to pay more wages, and my employer’s revenues cannot go up until their buyers receive higher income. And so on. Just because Bernanke prints an additonal $40 billion a month in exchange for MBS, it doesn’t mean my employer’s income will instantly rise. My employer will have to wait for some of that new money to reach HIS bank account.

    Now, connecting this back to liquidity injections, Austrian theory makes it clear that the business cycle is brought about to the extent that new money enters the loan market, which leads investors into allocating capital to projects that require more REAL savings than what are actually available. Investors cannot separate nominal interest rates into market driven and non-market driven. Only nominal rates are observable. And even if apme investors guess right, and go about making investments as if they were in accordance with market driven rates, profits can still be made by “being wrong”. Investors who borrow cheap and expand malinvestments, can make profits for a time. This compels otherwise prudent investors to play the same game of musical chairs if they want to compete and not lose market share. That’s why “rational” investors are at a disadvantage during bubbles. Even if they acted prudently, they would be outcompeted by “irrational” investors.

    It is not necessarily important that the names of the people who recive the new money are “JP Morgan” or “Bank of America”. It is more about actions people take. When new money enters the economy, through the loan market, it brings about what Austrians call “malinvestment”. These are investments that while are nominally profitable, are physically unsustainable because they require more real savings from the consumers than what consumers are actually “releasing” via their saving. Remember, just because the central bank succeeds in changing nominal interest rates in the short run, it doesn’t mean consumers are actually saving more or less that would justify investors changing the structure of production that requires changes in savings.

  20. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 13:20

    sorry, ” even if some investors guess right”, vice “apme investors”

  21. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 13:36

    ssumner:

    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 an incorrect assertion that for some reason you continue to perpetuate as if it’s true. No, the newly injected cash is not exchanged for goods at market prices. The newly injected money RAISES the prices of that which is being sold to the non-market money injector, from what it otherwise would have been had that non-market money injector not injected money.

    The flaw in your approach is the belief that if the Fed isn’t “administering” prices of the things it buys, if non-Fed parties are setting the prices, that somehow that means the prices are market prices. But this is no more an example of “market” prices than if the treasury announced tomorrow that it will start paying “market prices” for S&P 500 stock, which will encourage investors to start buying more S&P 500 stock, which will raise the nominal demand for those stocks above what they otherwise would have been.

    The Fed promising to buy X at whatever price prevails, will tend to increase the prevailing price of X. The Fed operates by letting market participants do the price increase work for them. The Fed can raise the price of basically everything simply by promising to start purchasing it. Remember, the Fed ADDS a nominal demand component to pricing by virtue of its money creation.

  22. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 13:43

    It was Hayek who mainstreamed the term “non-neutral money” — it was later math economists who stole the term, and gave if a different meaning. Then it was math economists who put a bullet in the head of grad school the history of economic thought.

    You, Scott, are not Richmond’s audience. People who actual know the economics or want to know the economics he is talking about are his audience.

  23. Gravatar of Bob Murphy Bob Murphy
    2. December 2012 at 13:51

    Scott, if the government (not the Fed) decides to support wheat prices and keeps buying (and putting it in silos) until the market price hits the desired level, strictly speaking they are just “buying at market prices” aren’t they? Or at least, they’re doing so in the same way that you are now defending what the Fed does?

    When a central bank engages in OMO in regular times, in order to “cut interest rates,” are you denying that they raise the market price of bonds?

  24. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 13:51

    What did the professors of econoimcs do when I included Hayek’s classic and original definition of “neutral money” and “non-neutral money” among the accounts of “neutral money” on the Wikipedia page — they deleted it, blackballed it, buried it, shot it in the head, pretended it didn’t exist.

    This is the ‘principle of charity’ used in contests between explanatory rivals in economics — kill the messenger, delete the messenger, falsely explicate, belittle and attempt to marginalize the messenger. And the language of “So I am not quite sure why” is part of the language of belittling, marginalization … calling Richmond an idiot, in effect. That’s how you ‘politely’ do it. This isn’t an out for you, this is your very method of abusing the principle of charity.

    This is what you are trying to do with Richmond. You aren’t trying to figure out why he says something, you are trying to belittle and marginalize rival explanatory speech.

  25. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 13:53

    The enforcers in the econ departments even deleted my very brief account of Hayek’s historical role in the popularization of the term “neutral money”.

    Blackballs, blackballs, and more blackballs. It’s the way of ‘science’.

  26. Gravatar of JP Koning JP Koning
    2. December 2012 at 14:11

    “I mean the price that you or I would pay if we bought $100,000,000 in bonds.”

    In threatening purchases of x the Fed pushes x’s price above the level where mere weaklings like you (Scott) or myself could purchase them. This ability to purchase at non-market prices is what gives the the Fed its power.

    This is really just a debate on how quickly prices settle to their new equilibrium. During that adjustment period some groups benefit at the expense of others, as Bill W + MF point out. The duration and significance of this effect is probably an empirical question.

  27. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 14:12

    Hayek’s most simple definition of non-neutral money: changes in the supply of money, credit & money substitutes which alter the complete and entire structure of relative prices and production streams in such as way that the alteration is not sustainable across time, eg such that by the inevitability of scarcities and price changes in the future, a systematic cascade of profit and production expectation cannot be fulfilled.

    There is it Scott, have at it.

  28. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 14:29

    Non-neutral money = the phenomena described in:

    The Big Short by Michael Lewis

    William White et al BIS papers:

    http://www.bis.org/search/?q=hayek&mp=any&_st=false&c=10&sb=0

    “Long Shadows: Collateral Money, Asset Bubbles and Inflation” by Jonathan Wilmot, James Sweeney, Matthias Klein, and Carl Lantz:

    http://faculty.unlv.edu/msullivan/Sweeney%20-%20Money%20supply%20and%20inflation.pdf

  29. Gravatar of Scott Sumner Scott Sumner
    2. December 2012 at 14:31

    Nick, Of course there are distributive effects of monetary stimulus (although it often hurts bondholders.) But that has no bearing on my post, as those distributive effects don’t depend on who gets the money first.

    I would add that monetary stimulus tends to benefit the unemployed, but that’s because it’s not a zero sum game—it tends to create jobs if the economy is depressed. It might help stockholders and hurt bondholders for the same reason.

    dtoh, You are confusing demand for apples (or money) with aggregate demand (NGDP.) When one goes up the other goes down. Less demand for apples means GDP rises in apple terms, just as less demand for money means GDP rises in money terms.

    It makes no sense to argue money balances are small, given that cash is usually 90% plus of the monetary base. Those small cash balances are what drive NGDP when interest rates are positive. We know that expected inflation affects demand for cash, as the cash/GDP ratio is negatively correlated with inflation.

    Greg, Just as I predicted it was all bluster on your part. You can’t give me an alternative definition of non-neutrality that would make Richman right. It was all a bluff on your part, just as I predicted. Next time don’t try to slip one past me–I’ll call you on it.

    Bob, When the government buys lots of wheat the real price of wheat rises. When the government buys lots of bonds the real price of bonds usually falls (from inflation). So that’s not a good analogy.

    And in addition, wheat purchases cost the government real resources, bond purchses are just the swap of one asset for another. The government usually makes money via seignorage. So not a good analogy.

    In any case, even if you were right your comment would have no bearing on this post, as the effect on debt held by the public is identical in each of the 4 cases. Recall I was holding fiscal policy constant. So if bond prices did rise, my response would be “so what?” That would happen regardless of how the money is injected–even if it was spent on public employee wages, not bonds.

  30. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 14:33

    JP Konig writes,

    “During that adjustment period some groups benefit at the expense of others, as Bill W + MF point out. The duration and significance of this effect is probably an empirical question.”

    The point is, some of what we would identify as the’benefit’ and some of those who are ‘benefiting’ are folks who are expanding the pool of shadow money and are expanding the length of production processes in a networks of relations which are not unsustainable across time.

    The are ‘benefiting’ by increases in the size of asset values of various kinds which are not sustainable.

  31. Gravatar of Scott Sumner Scott Sumner
    2. December 2012 at 14:33

    Greg, I see you’ve just made a sad attempt, but of course those are exactly the sort of non-neutralities that mainstream economists do evaluate–relative price changes, unsustainable production, etc. Is that all you got?

  32. Gravatar of Scott Sumner Scott Sumner
    2. December 2012 at 14:45

    JP, You said;

    “In threatening purchases of x the Fed pushes x’s price above the level where mere weaklings like you (Scott) or myself could purchase them. This ability to purchase at non-market prices is what gives the the Fed its power.”

    This is false. The easiest way to see why is to consider monetary policy during normal times, when rates are positive. In that case bond purchases that have an important impact on the base have virtually no significant impact on bond prices. that’s because the bond market is far deeper. And if it does have an effect, the price often goes DOWN (see the monetary easing of January 2001 or September 2007, when bond prices fell on the news.)

    In any case, this is somewhat off topic, and has no bearing on my post, which held debt outstanding constant.

    Monetary policy can be thought of as the injection of money, which has powerful effects on the economy, and a choice about which asset to buy, which has trivial effects. Take a small country and assume they buy US bonds, not their own debt. Obviously the impact of the OMO would be very similar. Now swap the foreign bonds for domestic bonds. Does this second action have a significant effect on the economy? Clearly not, indeed I did a recent post discussing how the Swiss recently swapped some euro assets for dollar assets. The markets yawned. There’s a reason the base is called “high powered money” when interest rates are positive. It’s the market for base money that drives NGDP, not the market for bonds, or whatever else the central bank happens to buy.

    In the old days they bought gold, not bonds, and the interest rate effect was essentially the same, with the exception that there obviously wasn’t much fear of inflation under the gold standard. If rates do fall, it’s due to the liquidity effect of more cash, not the particular asset being purchased.

  33. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 14:52

    ssumner:

    When the government buys lots of wheat the real price of wheat rises. When the government buys lots of bonds the real price of bonds usually falls (from inflation). So that’s not a good analogy.

    No, when the price of wheat rises from inflation, the real price of wheat does not rise, because the same wheat is being used to indirectly purchase other goods. Real price means price corrected for inflation. If inflation adds 3% to the price of wheat, then the real price of wheat is the prevailing price minus the 3% price inflation. The analogy to wheat is sound.

    If you don’t like wheat, then consider stocks, or some other financial security. The principle is the same.

    And in addition, wheat purchases cost the government real resources, bond purchses are just the swap of one asset for another. The government usually makes money via seignorage. So not a good analogy.

    Bond purchases costs the government real resources as well. Electricity for computers, consumer goods that sustain the government employees who facilitate the bond purchases, the storage space on computer hard drives, etc. You can argue that these costs are smaller than the costs of purchasing wheat, but you can’t argue it’s not a good analogy due to purchasing wheat incurring costs, as if purchasing bonds is cost free. There is no such thing as a costless action. All economic actions have opportunity costs, and all economic actions use up real resources.

    In any case, even if you were right your comment would have no bearing on this post, as the effect on debt held by the public is identical in each of the 4 cases. Recall I was holding fiscal policy constant. So if bond prices did rise, my response would be “so what?” That would happen regardless of how the money is injected–even if it was spent on public employee wages, not bonds.

    It’s not good enough to construct 4 hypothetical examples where it just so happens to show no difference. What kind of a silly example is it to imagine the Treasury creating and then donating a t-bond to the Fed, when the inflation is used to pay government employee salaries rather than t-bonds?

    Imagine the Treasury did not create and donate a t-bond to the treasury, and just borrowed less because the financing of wages comes from the printing press. If this new money goes to those salaries, where money is spent, rather than going to the loan market, where money is lent, then that will have different effects on the economy. One will bring about the business cycle, the other will not.

    of course those are exactly the sort of non-neutralities that mainstream economists do evaluate–relative price changes, unsustainable production, etc.

    That is precisely why Austrians argue that it matters where the newly created money goes! You say “it makes very little difference”, but whatever adjective you want to use to relate to this “difference”, is, in Austrian theory, sufficient to changing the structure of the economy to such a degree that only continually accelerating monetary inflation can prolong it, which means when the central bank refuses to do that, the malinvestments (due to relative price changes, such as the relative prices between current and future oriented goods), are exposed.

  34. Gravatar of Andrew Andrew
    2. December 2012 at 15:16

    Scott, you wrote that “Monetary policy can be thought of as the injection of money, which has powerful effects on the economy, and a choice about which asset to buy, which has trivial effects.”

    Then you wrote:
    “In the old days they bought gold, not bonds, and the interest rate effect was essentially the same, with the exception that there obviously wasn’t much fear of inflation under the gold standard. If rates do fall, it’s due to the liquidity effect of more cash, not the particular asset being purchased.”

    Suppose that when Bernanke announced QE3 on 9/13, he said that the Fed would buy gold instead of MBS. Do you think that the relative prices of gold and MBS would be the same today as they in fact are today? To my civilian mind, it seems obvious that gold would have become (non-trivially) more expensive relative to MBS, but I’m well aware that I could be wrong.

  35. Gravatar of JP Koning JP Koning
    2. December 2012 at 15:19

    “This is false. The easiest way to see why is to consider monetary policy during normal times, when rates are positive. In that case bond purchases that have an important impact on the base have virtually no significant impact on bond prices.”

    Ok, rewind rewind. Bonds are a bad example.

    In threatening purchases of the S&P500 the Fed pushes S&P500 price above the level where mere weaklings like you (Scott) or myself could purchase this index. This ability to purchase at non-market prices is what gives the the Fed its power.

  36. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 15:30

    ssumner:

    JP Koning: “In threatening purchases of x the Fed pushes x’s price above the level where mere weaklings like you (Scott) or myself could purchase them. This ability to purchase at non-market prices is what gives the the Fed its power.”

    This is false. The easiest way to see why is to consider monetary policy during normal times, when rates are positive. In that case bond purchases that have an important impact on the base have virtually no significant impact on bond prices.

    Notice how you said “virtually no significant impact.” In other words, you admit that it does have a non-zero impact. Are you trying to argue two mutually exclusive positions at once? That it both has, and does not have, an impact on prices? Let’s be clear here. If you admit it has an effect, then you have not rejected Austrian theory.

    Regardless of the “depth” of the non-Fed market for bonds, the fact that bond investors know that the Fed is there as a marginal buyer, as a lender of last resort, that has a (significant or not significant) effect on bond prices.

    Imagine that tomorrow the Fed promised to stop buying government debt tomorrow, and instead promised to start buying S&P 500 shares. Do you actually believe that there would be “virtually no significant impact on t-bond prices”? That because the non-Fed markets for government debt and S&P 500 stocks are “so deep”, that we might see only a few bps change?

    I would think that if the Fed promised to stop buying government debt tomorrow, all the bond investors who only bought debt to flip it to the Fed soon after, would run for the exits, and there would be a noticeable temporal decline in demand for government debt, and the prices would temporally decline by more than whatever “virtually no impact” seems to imply.

    that’s because the bond market is far deeper. And if it does have an effect, the price often goes DOWN (see the monetary easing of January 2001 or September 2007, when bond prices fell on the news.)

    You are incorrectly inferring post hoc ergo propter hoc. Your’e cherry picking two dates when it just so happened that Fed announcements were followed by nominal temporal declines in prices. But that ignores two important factors:

    1. Insider investors already priced in Fed purchases PRIOR, which raised the price from what they otherwise would have been, and then, on announcement day, either the promise was not as great as expected (in which case prices fell), or the promise was as great as expected, but there were other factors, omitted factors, present that acted to put downward pressure on prices.

    2. Explicating this latter point about omitted factors further: Other factors could have been acting in concert with the Fed’s announcement, which put downward pressure on bond prices, such that the resulting upward pressure from the Fed’s purchasing was insufficient to generate a nominal temporal increase in price. In other words, one can argue that had the Fed NOT purchased those bonds at that time, then the fall in price would have been even greater than it was.

    Just consider all the other times other than the cherry picked dates January 2001 and September 2007, when the Fed announced it will buy bonds, and rates subsequently fell. There are MANY examples of this. Now, while this data alone also would not be proof that the decreased rates were caused by the Fed’s inflation (for the same two reasons above), it does show that your theory that Fed promises to buy bonds allegedly makes bond prices fall, is incorrect.

    The way the Fed lowers the fed funds rate, for example, is by purchasing more government bonds and increasing bank reserves by more than what otherwise would have been insufficient to coax banks into setting a lower fed funds rate. Borrowing in the overnight market is cheaper when banks are more flush with reserves. If tomorrow the Fed promised to stop inflating, then the fed funds rate would almost certainly go up, not down, as banks scramble for money they thought was going to be available in the future, which will reduce the supply of loans offered and increase the demand for loans sought. The overnight rate will be higher than it otherwise would have been.

    If you are a lender, and you earn $100,000 a year, then you will lend money at the highest risk adjusted rates you can get, call it X%. If I then promised to buy your weekly garbage for $100,000, such that your bank account becomes flush with new money, then your job as a lender will see you lend at lower risk adjusted rates than you otherwise would have gotten, not higher risk adjusted rates, because you will have to lower the rate to find the marginal buyers who would otherwise have been outcompeted by other borrowers who would have paid otherwise higher risk adjusted rates.

    Of course, once the new loans are borrowed and spent, that will raise aggregate spending, which will raise profits, and that will eventually start putting upward pressure on interest rates. But in the interim, which is where we always are day after day, because we live with constant perpetual Fed intervention, not one time inflation episodes, interest rates were lower than they otherwise would have been because of the increased money in lender’s bank accounts.

  37. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 15:41

    ssumner:

    “This is false. The easiest way to see why is to consider monetary policy during normal times, when rates are positive. In that case bond purchases that have an important impact on the base have virtually no significant impact on bond prices.”

    This comment is just re-asserting your theory that it has no impact. You’re essentially saying “The easiest way to see that bond purchases have virtually no impact on bond prices…is to assume that the theory that purchases have virtually no impact on bond prices, is the correct theory.”

    Well duh. One could just as well argue “”The easiest way to see that bond purchases have virtually no impact on bond prices…is to assume that the theory that purchases have a significant impact on bond prices, is the correct theory.

    How do you know that the bond prices would not have otherwise been lower had the Fed not purchased those bonds? Even if bond prices fell over time after an inflation announcement, you cannot rule out that the fall in prices would have been even greater had the Fed not made the announcement.

    Remember, economics is a counter-factual science. We don’t look at bond prices over time and then believe we can pinpoint past events that caused those changes. No, we look at bonds prices over time and make conclusions about what those prices would have otherwise have been had different actions been taken.

    Economic data is far too complex to allow for events to be isolated and their causes identified as “the” causes for why those event data were observed.

  38. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 15:42

    Sorry, I meant to say

    “One could just as well argue “”The easiest way to see that bond purchases have a significant impact on bond prices…is to assume that the theory that purchases have a significant impact on bond prices, is the correct theory.

  39. Gravatar of Bob Murphy Bob Murphy
    2. December 2012 at 16:33

    One more and I’ll leave you alone Scott: On Monday Bernanke announces, “Over the weekend we had a meeting and we’ve decided that instead of buying mortgage-backed securities, from now on we’re going to buy tacos each month.”

    Scott, vis-a-vis your dispute with the Austrians on this, you have to take one of two positions regarding the above scenario:

    (A) Say this news won’t bother the current private holders of MBS, and it won’t cheer up taco dealers,

    or

    (B) Admit that what the Austrians mean by “it matters how the money gets into the economy” is a valid point, and that your earlier criticisms were due to a misunderstanding of what they were talking about.

  40. Gravatar of dtoh dtoh
    2. December 2012 at 16:44

    Scott,
    I’m sure cash/GDP is negatively correlated with inflation at high inflation rates, but with low rates of inflation I would think the relationship is pretty flat. I don’t know I’m just surmising on the basis of what would be rationale behavior. Have you seen any data on this?

  41. Gravatar of Matt Waters Matt Waters
    2. December 2012 at 17:19

    Bob,

    I think you make a good point that the specific mechanism of OMO’s do matter to a certain extent.

    Most of the criticisms of OMO’s are extremely facile. Just because the regular OMO’s buy bonds from banks does not mean the Fed receives some subsidy. Nor does it mean that there would somehow be a run on Treasuries without the Fed buying them. For banks, treasuries are bought on the open market at market prices and it’s public knowledge that the Fed would be buying Treasuries. For banks to consistently earn money on the purchases, they would need non-public information. Also, all Treasuries are ultimately backed by the possibility of printing money to buy them. Moving forward the time-table of buying them does not affect their risk-free status.

    But you do run into issues of the Fed buying, say, tacos or, more realistically, things like the Fed bailout of AIG or Bear Stearns. The difference is that those things constitute a change in fiscal policy. In the examples Scott gave in his post, the make-up of federal spending does not change. For fiscal policy, it does not matter whether federal salaries that have already been appropriated are paid through new Treasuries or new cash.

    What does change is that a Treasury is not issued to pay federal salaries, and the money that would have purchased that Treasury has to go elsewhere. That’s how new money injections increase PRIVATE spending. By contrast, if the Fed buys tacos with new money, it would be like a Congressional appropriation to buy tacos. It would be a fine Keynesian stimulus, employing many new taco-makers, but it would lead to less RGDP than if private actors decided on what to spend money on, which would likely not be tacos.

  42. Gravatar of Bill Woolsey Bill Woolsey
    2. December 2012 at 18:23

    Scott:

    The Fed does not purchase government bonds with satchels of currency. It is silly to add statements about them depositing currency in banks. It is in banks when it is created.

    The dealers receive newly created money in the form of bank deposits, and the banks receive matching reserve balances at the Fed. There is no currency involved. Only if the dealers wanted more currency would they withdraw it from their bank and their bank from the Fed, which would have the currency printed up.

    When we go the extra step and consider the final holders of the securities, from whom the dealers buy, then they also receive the funds directly in their checkable deposit, and their banks receive a matching reserve balance.

    If the dealers are banks, then they receive reserve balances in return for bond and no one ends up with depostis. If those from whom the dealers buy are banks, then those banks end up with more reserves. Still, no tangible currency is involved.

  43. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 18:25

    Matt Waters:

    I think you make a good point that the specific mechanism of OMO’s do matter to a certain extent.

    All extents are certain extents.

    Most of the criticisms of OMO’s are extremely facile. Just because the regular OMO’s buy bonds from banks does not mean the Fed receives some subsidy.

    You mean it does not mean the banks receive some subsidy? If so, it does mean the banks receive a subsidy. They receive a subsidy in the form of relatively higher real income, the same way you would receive a real subsidy if the Fed bought your bonds. The gains you make from the money come at the expense of someone, since the money you get was not earned by the Fed via productive activity.

    Nor does it mean that there would somehow be a run on Treasuries without the Fed buying them.

    It doesn’t have to be a run per se. The argument is that the prices would otherwise be lower if the Fed stopped buying bonds. We don’t even need to see a temporal decline in prices either.

    For banks, treasuries are bought on the open market at market prices and it’s public knowledge that the Fed would be buying Treasuries. For banks to consistently earn money on the purchases, they would need non-public information.

    Trading consistently consists of non-public information, or at the very least, superior versus inferior information.

    The banks can consistently earn real gains, as they receive new money before others, and as a result pay lower prices for others goods. This is the case even if the new money is “swapped” for bonds.

    But you do run into issues of the Fed buying, say, tacos or, more realistically, things like the Fed bailout of AIG or Bear Stearns. The difference is that those things constitute a change in fiscal policy. In the examples Scott gave in his post, the make-up of federal spending does not change. For fiscal policy, it does not matter whether federal salaries that have already been appropriated are paid through new Treasuries or new cash.

    This is a very weak argument. You are saying that if the Fed buys X instead of Y, then all you have to do is call the Fed buying X “fiscal policy” and the Fed buying Y “monetary policy”, and that somehow means everything is different?

    At any rate, if the Fed is printing money, then the assumption of no change in fiscal spending, is not a realistic assumption. Even if the Fed isn’t buying bonds, but rather labor, then the taxes the government collects on the additional income of those employees, would enable the government to spend more. In order for the asumption of unchanged spending to take place, we would have to assume that when the government taxes the additional employee income, that they would curtail taxes and spending elsewhere. Not likely!

    What does change is that a Treasury is not issued to pay federal salaries, and the money that would have purchased that Treasury has to go elsewhere. That’s how new money injections increase PRIVATE spending. By contrast, if the Fed buys tacos with new money, it would be like a Congressional appropriation to buy tacos. It would be a fine Keynesian stimulus, employing many new taco-makers, but it would lead to less RGDP than if private actors decided on what to spend money on, which would likely not be tacos.

    Dude, the same reasoning you are applying to tacos, holds no less for government bonds.

  44. Gravatar of Negation of Ideology Negation of Ideology
    2. December 2012 at 18:28

    Scott – Fantastic post.

    Trading one government security (a Federal Reserve Note) for another (a Treasury bond) clearly privileges no one. When we had large surpluses in the late 90′s, the Treasury considered buying back long term T-bonds. Do “Austrians” think that was some kind of special benefit to those bondholders? Wasn’t the government planning on eventually paying those bonds when they came due anyway?

    When Ford offered to buy back some long term Ford bonds at a discount, was it giving some kind of special privilege to the bondholders who chose to cash out?

    Now I could understand making that argument if the Fed was buying gold, or tacos as suggested by a commenter, but not for Treasuries. Even the mortgage backed securities that the Fed is buying are already backed by the Treasury, so they’re already effectively Treasuries as far as the Fed is concerned.

  45. Gravatar of Benjamin Cole Benjamin Cole
    2. December 2012 at 18:37

    QE puts cash into the hands of people who sold securities. I guess if they sell crappy securities to the Fed, then they benefit. Probably, the Fed should only buy Treasuries, and that action would also pay down national debt.

    Still a great idea to run national lotteries in which many small payouts exceed amount of tickets sold, in dollar terms. In other words, most people buy $50 and $100 tickets and win $100 or $200. In this way, money could be injected into the economy and immediately benefit “average” people, who would spend it. Transaction costs–that is, one can only buy $100 in tickets at any location, or a max of $200 a day, say–would prevent the lottery from being locked up by wealthy buyers.

    But in the end, anything the Fed does will help one group or another.

    The real question is, do we want the Fed to follow pro-growth policies, or be hamstrung by fears of benefitting any particular group?

  46. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 18:48

    Negation of Ideology:

    Trading one government security (a Federal Reserve Note) for another (a Treasury bond) clearly privileges no one. When we had large surpluses in the late 90′s, the Treasury considered buying back long term T-bonds. Do “Austrians” think that was some kind of special benefit to those bondholders? Wasn’t the government planning on eventually paying those bonds when they came due anyway?

    Negation, if you are unable to grasp the Cantillon Effect, then you should at least be able to see that the printing of money to acquire interest paying bonds benefits those at the Fed who can acquire those bonds by creating new money out of thin air. Are you saying that if I printed money to acquire someone else’s risk free bond, that I am not benefiting by this?

    Now, when the Fed buys interest paying bonds, they keep some of the money (to finance their guaranteed 6% dividend, wages, expenses, etc), and remit a substantial portion back to treasury. To this extent, the treasury is borrowing money at zero interest. That is, it is a gift of money to the Treasury. One agency of the state prints money to subsidize another agency of the state, which is to say the state benefits from inflation. Since all gains have costs that fall on someone, it means that if the state gains from inflation, those not in the state have the costs imposed on them. You know, there ain’t no such thing as a fre lunch? Ring a bell?

    It is sometimes quite remarkable the amount of mental gymnastics that inflation apologists engage in when trying to defend it against critics. I mean, there is definitely a mental block of some sort. You seem to “get it” if the Fed buys tacos:

    Now I could understand making that argument if the Fed was buying gold, or tacos as suggested by a commenter, but not for Treasuries. Even the mortgage backed securities that the Fed is buying are already backed by the Treasury, so they’re already effectively Treasuries as far as the Fed is concerned.

    The same “subsidy” logic that applies to gold, or tacos, applies to treasuries as well.

  47. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 18:59

    Bob Murphy with his tacks comment just preempted what I came here to write.

    Well done, Bob.

  48. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 19:00

    last

  49. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 19:09

    The contested issue is what are the relevant relative price differentials and what unsustainable processes are relevant.

    It is simply not true that the literature is full of studies focusing on the factors Hayek identifies as of causal significance.

    This is typical of conversations between explanatory rivals as Thomas Kuhn repeatedly points out. Any educated person should be well aware of this. Explanatory rivals are always forced to use overlapping language with significan non-shared significance, most especially non-shared causal significance.

    Scott writes,

    “he sort of non-neutralities that mainstream economists do evaluate–relative price changes, unsustainable production,”

  50. Gravatar of Major_Freedom Major_Freedom
    2. December 2012 at 19:12

    Benjamin Cole:

    You made a reasonable post. Just some quibbles:

    QE puts cash into the hands of people who sold securities. I guess if they sell crappy securities to the Fed, then they benefit. Probably, the Fed should only buy Treasuries, and that action would also pay down national debt.

    I would be careful with approaching this problem by interjecting a personal value judgment concerning the things the Fed buys, such that if the things people sell to the Fed are “crappy”, then they supposedly benefit, but if the things are “not crappy”, then they supposedly do not benefit. For how would you define “crappy”? You may believe treasury bonds are not “crappy”, whereas I may think they are “crappy”, and we wouldn’t get anywhere. What matters here is all individual valuations as manifested in market activity. Inflating to buy “good” securities can benefit the sellers the same way inflating to buy “bad” securities would. The point is the additional nominal demand component that the Fed brings to the table. Whatever the Fed offers to buy, it benefits the receivers of the money.

    Still a great idea to run national lotteries in which many small payouts exceed amount of tickets sold, in dollar terms. In other words, most people buy $50 and $100 tickets and win $100 or $200. In this way, money could be injected into the economy and immediately benefit “average” people, who would spend it. Transaction costs–that is, one can only buy $100 in tickets at any location, or a max of $200 a day, say–would prevent the lottery from being locked up by wealthy buyers.

    While ideas like this would reduce the problem of “some benefiting at other’s expense”, by eliminating the bias towards one group of people (bankers) and bias against others (those who typically receive the new money last, such as those who earn relatively fixed incomes), it would not eliminate the gaining at other’s expense qua gaining at other’s expense.

    Further (and not that I am complaining about this), but it would also have less of a stimulative impact on the economy. When more people receive the new money, it makes inflation have less of an impact, which (and this is what I will complain about) will encourage the central bank to increase the rate of inflation due to a perceived lack of sufficient inflation to make people’s lives sufficiently better off.

    But in the end, anything the Fed does will help one group or another.

    The real question is, do we want the Fed to follow pro-growth policies, or be hamstrung by fears of benefitting any particular group?

    Inflation is inimical to growth. It hampers growth. There is no profit and loss signals that would enable the Fed to know how much money to create, nor who to give the money to, nor what to buy, nor when to buy. Socialist planning is a flawed method.

  51. Gravatar of Bill Woolsey Bill Woolsey
    2. December 2012 at 19:20

    Suppose gold solely serves as money, and the quantity of money is 1000 ounces. A miner disovers 100 ounces. The price level immediately rises 10%, before the miner spends anything. Does that mean the miner gets no benefit from his gold discovery? No, it is just that his gold, like everyone else’s gold buys 10% less than before the discovery. His 100 ounces buys what 90 ounces would have bought before the gold discovery.

    The notion that the miner gains because he spends the gold first, before it loses value is false. Now, it is possible that he could spend all of the gold before the price level rises, or maybe some it, and so purchases goods that would have been worth more than 90 ounces before the gold discovery. But surely, that isn’t the primary impact.

    How is it that the gold miner ends up with goods worth 100 ounces now, that would have been worth 90 ounces before? It is that all of those people that were holding the 1000 ounces now need 1100 ounces to make up the real balances they want to hold. They way they increase their balances is by spending 100 ounces less than they earn. Suppose velocity is 5, and so they were earning 5000 ounces and spending 5000 ounces. They now spend 4900 ounces, so they end up with their initial balances of 1000 ounces plus 100 ounces. How can they earn 5000 ounces and only spend 4900 ounces? The miner spends the 100 ounces.

    How does this impact relative prices and the composition of output? Well, it does to the degree the miner spends the money different than all of those who were holding money reduce their real expenditures.

    Now, if we have a pure fiat currency, and the money supply is $1000, and the government prints up $100, then the price level immediately rises 10%. The government can now purchase goods that were worth $90.

    Everying is the same as before, except if the government spends the money on some particular product, then its relative price will rise and the production of it will expand relative to other goods. Say tanks.

    On the other hand, if the money creation funds tax cuts, the situation is more like that of the miner. The notion that the money creation would be purely neutral is unlikely, but those reducing expenditure to rebuild real money balances and increasing expenditure out of tax cuts are likely similar.

    But suppose the money creating allows the government to reduce other borrowing funding an existing budget deficit? Or suppose there is no current budget defict at all, and the money creation is used to repay part of an existing national debt?

    Of course, the realistic framing is an existing budget deficit with money creation reducing other government borrowing.

    In my view, reducing government borrowing allows a reduction in other taxes or else an increase in government spending in the future.

    Neutral? Not likely. But is it the banks or security dealers that are gaining?

  52. Gravatar of Mike Sax Mike Sax
    2. December 2012 at 19:46

    “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.”

    Whether or not it’s the most researched question-if it’s not it probably deserves to be-I think it’s fair to say that most mainstream economists-or “neoclassical” if you prefer-don’t believe in non-netruality at least in the long run. You have those who think it’s non-neutral in the short run and those who think even in the short run it’s neutral.

  53. Gravatar of Mike Sax Mike Sax
    2. December 2012 at 19:58

    Hayek invented the idea of non-neutrality of money?

  54. Gravatar of It does matter how new money is injected, but that’s probably bad terminology « Increasing Marginal Utility It does matter how new money is injected, but that’s probably bad terminology « Increasing Marginal Utility
    2. December 2012 at 20:49

    [...] Sumner, criticizing Sheldon Richman, writes, The second assertion is odd, as the non-neutrality of money is probably the single most heavily [...]

  55. Gravatar of Mike Sproul Mike Sproul
    2. December 2012 at 21:08

    Scott:

    You sounded like a backing theorist until this:

    “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.”

    Think of the government’s T-account. It has $100 of wages payable on the liability side. The government could sell a $100 bond and pay those workers. $100 of wages payable is replaced with the $100 bond. Just one liability swapped for another.

    If the government instead issued $100 of new notes to pay those workers, the $100 of notes replace the $100 of wages payable. Still just one liability swapped for another.

    Or, having paid the workers by issuing a bond, the government issues $100 cash and uses it to buy back that bonds. Still one liability swapped for another.

    It’s just like a corporation issuing one kind of debt to replace another. Nothing happens.

  56. Gravatar of John John
    2. December 2012 at 21:28

    If money is all neutral, why not have the Fed print money and pay me to as a way of controlling the money supply. It won’t affect the money aggregates any differently than normal open market operations, and I promise not to park any of it in excess reserves. I’ll buy lots of Ferraris, yachts, and private jets but since money is neutral, I won’t be gaining anything.

  57. Gravatar of Max Max
    2. December 2012 at 21:35

    “Now, if we have a pure fiat currency, and the money supply is $1000, and the government prints up $100, then the price level immediately rises 10%.”

    By “pure fiat” do you mean something like bitcoins, i.e. a currency that is not anyone’s liability?

  58. Gravatar of Philemon Philemon
    2. December 2012 at 21:53

    Suppose gold solely serves as money, and the quantity of money is 1000 ounces. A miner disovers 100 ounces. The price level immediately rises 10%, before the miner spends anything. Does that mean the miner gets no benefit from his gold discovery? No, it is just that his gold, like everyone else’s gold buys 10% less than before the discovery. His 100 ounces buys what 90 ounces would have bought before the gold discovery.

    I’m just trying to understand this.

    So before the discovery of the 100 oz of gold, let’s say that the 1,000 oz of gold in circulation buys a total of 1,000 units of goods. After the discovery, 1,100 oz of gold buys 1,000 units of goods–which is why you said that 100 oz of gold now buys (about) 90% of what it used to buy. Ok. So far so good.

    But I thought the point was that the *miner* now gets to buy stuff he didn’t. Let’s say that everyone else were holding on to that 1,000 oz of gold–which buys them 1,000 units of goods, and the miner had none–which buys him none.

    *After* the discovery, the miner can now buy about 90 units of goods, while everyone else about 910 units of goods. in other words, the discovery of the 100 oz of gold effectively transferred about 10% of the net purchasing power in the economy to him, from everyone else. (The point still holds even if we assume that he starts with some of that original 1,000 oz of gold.

  59. Gravatar of Philemon Philemon
    2. December 2012 at 21:55

    Sorry, my previous was supposed to be @Bill Woolsey

  60. Gravatar of Saturos Saturos
    2. December 2012 at 22:15

    “Monetary policy can be thought of as the injection of money, which has powerful effects on the economy, and a choice about which asset to buy, which has trivial effects.”

    Scott, how then do you explain why people like Ben Bernanke and Miles Kimball seem to think that it [the latter] has quite non-trivial effects?

  61. Gravatar of Saturos Saturos
    2. December 2012 at 22:16

    Pity he couldn’t tell you why at the dinner…

  62. Gravatar of Saturos Saturos
    2. December 2012 at 22:19

    “If rates do fall, it’s due to the liquidity effect of more cash, not the particular asset being purchased.”

    Yes, Friedman was wrong in emphasizing the flow demand for bonds along with the stock equilibrium for the porfolio decision, it’s the latter that really drives interest rates. The Keynesians are correct about that.

  63. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 22:36

    Hayek made the term & concept well known in English, and inspired a literature on the topic, including a literature on the Hisotry of the term and alternative versions of the concept.

    “Hayek invented the idea of non-neutrality of money?”

  64. Gravatar of Greg Ransom Greg Ransom
    2. December 2012 at 22:38

    “Suppose gold solely serves as money, and the quantity of money is 1000 ounces. A miner disovers 100 ounces. The price level immediately rises 10%, before the miner spends anything.”

    How does this happen? By magic?

    If we assume magic, anything follows.

  65. Gravatar of Matt Waters Matt Waters
    2. December 2012 at 23:59

    “You mean it does not mean the banks receive some subsidy? If so, it does mean the banks receive a subsidy. They receive a subsidy in the form of relatively higher real income, the same way you would receive a real subsidy if the Fed bought your bonds. The gains you make from the money come at the expense of someone, since the money you get was not earned by the Fed via productive activity.”

    Huh? As far as the banks are concerned, the Fed is just like any other buyer. The New York desk puts in a market order for bonds exactly like a trader in London would. The New York desk also has twenty or so primary dealers, just like the trader in London.

    There is some business for the bank if they become a primary dealer, but that’s not what people mean when they say Fed purchases subsidize banks. They mean the banks enjoy price appreciation on their bonds, but banks have to buy bonds at market prices just like anyone else. So they have to somehow be smarter than the market when they buy them, i.e. have non-public information.

    “It doesn’t have to be a run per se. The argument is that the prices would otherwise be lower if the Fed stopped buying bonds. We don’t even need to see a temporal decline in prices either.”

    Sure, and that argument is flat wrong and unsupported by any evidence. There can be a run on Treasuries if the market expects one of two things to happen (or both to happen):

    1. The Fed does not sell bonds and thus destroy money as inflation recovers.

    2. The market expects the Fed to sell bonds, but it also expects Congress to run such high deficits for so long that the Fed exhausts all the bonds it can sell. The continued high deficit spending will increase inflation

    In both cases, the issue is not whether the bonds will be repaid. Even in the second case, the bonds will be repaid. The difference is in market expectations for inflation and thus the market demands higher interest rates to compensate for the devaluation of money.

    The simplistic view that Fed purchases always drive down interest rate because they increase demand presumes private Treasury market participants are irrational. Let’s say bond purchases will create out of control inflation. Then why are so many market participants purchasing bonds at low rates? They are free to do whatever they want with their money, but they buy 10-year Treasuries at 2% when, according to most Austrians, we’ll see crazy, double-digit inflation over that time. Low rates with high future inflation could be possible if the Fed was the only participant in the Treasury market, but that’s not what we’re seeing.

    The question has to be answered by Austrians and not simply shrugged off: why do billions of dollars each day buy 10-year Treasuries at 2% when inflation is likely over 10%?

    “Trading consistently consists of non-public information, or at the very least, superior versus inferior information.

    The banks can consistently earn real gains, as they receive new money before others, and as a result pay lower prices for others goods. This is the case even if the new money is “swapped” for bonds.”

    Again, this makes no sense. “As a result pay lower prices for other goods.” So, Goldman Sachs can sell a bond to the Fed and somehow buy a barrel of oil for cheaper than they could before with the non-Fed money they had stockpiled before. Huh?

    “This is a very weak argument. You are saying that if the Fed buys X instead of Y, then all you have to do is call the Fed buying X “fiscal policy” and the Fed buying Y “monetary policy”, and that somehow means everything is different?

    At any rate, if the Fed is printing money, then the assumption of no change in fiscal spending, is not a realistic assumption. Even if the Fed isn’t buying bonds, but rather labor, then the taxes the government collects on the additional income of those employees, would enable the government to spend more. In order for the asumption of unchanged spending to take place, we would have to assume that when the government taxes the additional employee income, that they would curtail taxes and spending elsewhere. Not likely!

    Dude, the same reasoning you are applying to tacos, holds no less for government bonds.”

    You know, after putting some though into this, the neutrality of assets that are purchases goes deeper than risk-free bonds. As controversially as it would be, even the purchase of, say, GE stock would not distort the price of GE stock any different than any other infusion of money.

    The Fed may purchase GE stock, but that in and of itself does not change the future cash flows to GE. That assumption applies if reflexivity does not apply and a change in GE stock, in and of itself, does not change future cash flows. One also needs to assume that the Fed is not signalling some change in expectations that GE’s bonds would be bailed out, and that GE could still go bankrupt like any other company. Otherwise, their cash flows are changed because they have lower financing costs.

    So, if GE’s actual cash flows do not change, why would the stock go up relative to, say, Treasuries or other stocks? Why would investors consider GE’s cash flows greener than the cash flows from Treasury bonds?

    Under efficient markets, this isn’t the case and both injections of money (buying GE or Treasury bonds) raise all boats. The new money increases demand for all investments, regardless of where the injection came from.

    So what about tacos? Here’s the difference. A purely financial asset, either a GE stock or a Treasury, is valued according to its future cash flows and the riskiness of those cash flows. The purchase of one with new money does not change the value RELATIVE to the value of another financial asset. The stock prices change on new information on cash flows, on change in general risk premium or on change in the underlying risk-free rate.

    Tacos, however, are not bought for their future cash flows but are bought for their taconess. Instead of the financial arbitrage that occurs between stocks and bonds, real-world assets have prices set directly by supply and demand. All money is equally green for financial assets.

    I’ll agree I have a hard time wrapping my head around the concept myself. It’s very un-Internet-like to say, but I still need to put more thought into the issue until I feel like I really understand the dynamics of OMO’s, interest rates, expectations and market distortions.

  66. Gravatar of Matt Waters Matt Waters
    3. December 2012 at 00:06

    “How does this happen? By magic?

    If we assume magic, anything follows.”

    I actually knew somebody who knew somebody who found a bug in some World of Warcraft shop that let him essentially create gold. He didn’t want to be found out by the mods and so he somewhat limited the gold he created and then sold for real-world money. But after he did so, he in fact did notice prices in his town or realm or whatever rose considerably.

    But anyway, I guess calling all of economics magic, including basic supply and demand, is as good as any summary of Austrian economics. In non-magic terms, economics usually assumes that money, in whatever form, is not held on to for long periods. It should have a somewhat constant velocity, but otherwise always be in use.

    When the miner finds the gold, the gold has the same velocity for the miner as any other gold. With the same velocity, the gold increases overall demand by 10% in the same time period. Since demand equals price*quantity, prices went up by 10% if quantity is constant (i.e. RGDP is at capacity levels).

  67. Gravatar of mijj mijj
    3. December 2012 at 01:24

    of course it makes a difference how created money is injected into the economy.

    eg. created money could be injected directly into the economy by using it to pay for government national infrastructure projects. So, not only do we have new money in circulation, we have an actual increase in value to show for it.

    is this article saying the pros and cons of this strategy would be identical to the pros and cons of the current strategy of money creation (which is actually power transfer to financial institutions)?

  68. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 01:27

    Here is a reality check for those illiterate in the history of economic thought:

    http://books.google.com/ngrams/graph?content=neutral+money%2C+neutrality+of+money&year_start=1800&year_end=2000&corpus=15&smoothing=3&share=

    You will notice the explosion of the use of the expression “neutral money” at a particular moment in time — the moment in time when Hayek made this topic a central part of the economic conversation.

  69. Gravatar of nickik nickik
    3. December 2012 at 01:28

    @Matt Waters

    > The question has to be answered by Austrians and not simply shrugged off: why do billions of dollars each day buy 10-year Treasuries at 2% when inflation is likely over 10%?

    Why are you under the impression that austrians clame such a thing? Sure there are some like Peter Schiff that go around talking about Hyperinflation in the next couple of years but most austrians clame no such thing.

  70. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 01:46

    Scott, you seem to be claiming that the contemporary literature on the neutrality of money is conceptual identical to the literature produced by Hayek in neutral money, and that data relevant to limning the former phenomena are identical to the data relavent to limning the later phenomena.

    If this is your understanding I would suggest that you are the only person on the planet with this understanding of things.

  71. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 02:32

    Scott, let me put the question to you in a simple form.

    Are you claiming that, conceptually regarding the neutrality or non-neutrality of money that Hayek = Patinkin ?

    And are you claiming empirical research verifying or falsifying Patinkin’s account of neutral money and the non-neutrality of money = empirical research verifying or falifying Hayek’s account of natural money and the non-neutrality of money?

    It would be extremely helpful if would make this clear, it would be extremelymunhelpful if you refused to straighten this up.

  72. Gravatar of Benjamin Cole Benjamin Cole
    3. December 2012 at 03:34

    Major Freedom–

    Thanks for your post regarding my lottery idea.

    I guess I just don’t care about moderate inflation that much. I think some inflation and growth go hand-in-hand. I would rather run the economy a little hot and get better growth.

    A joke and this is only a joke, not meant meanly:

    You know what one Austrian Monetarist said to the other after a successful surprise nuclear attack by Russia upon the USA?

    “We can prevent a true catastrophe by having the Fed and Treasury move to a gold standard.”

  73. Gravatar of Bill Woolsey Bill Woolsey
    3. December 2012 at 04:48

    Ransom:

    The gold miner’s good news is announced in the press. Everyone in the economy knows the current money stock is 1000 ounces. They divide the size of the gold strike (100) by 1000 and find get .1 or 10%. Knowing and believing the quantity theory of money, they expect all prices to rise 10%. They immediately mark up their prices accordingly.

    If they don’t set prices but have auctions, then what happens is buyers immediately raise their offer prices in order to beat the expected price increases and sellers immediately raise their ask prices waiting for the higher prices.

    I respect your thorough knowledge of Hayek, but come on. This is basic economics. Basic microeconomics supply and demand is that an expected increase in price results in lower supply and inceased demand, and so, an immediate increase in price. I’m sure Hayek was aware of this as are all economists.

    Of course the gold miner gets to obtain more goods and all of those who were already holding get fewer goods. And if the gold miner likes chocolate ice cream and everyone else prefers vanilla, then the relative price of chocolate ice cream will rise and the relative price of vanilla ice cream will fall. And the production of chocolate ice cream will expand and the production of vanilla ice cream will fall.

    But it is a mistake to treat those selling bonds to the central bank like they are gold miners. They gave up their bonds to get their money.

    That the gold miner gains at the expense of all of those holding money is correct. If the government prints up money and spends it, then the government–the voters–benefit at the expense of all of those holding money–also the voters.

    Suppose the newly created money is spent by the king on big parties at his palace. The people using money give up real resources to build up their nominal balances to retain their real balances, and the king and his friends use those resources for elaborate parties.

    On the other hand, suppose the money creation is used to fund an across the board cut in income tax rates for one year. I don’t think the result is neutral. It is almost certain that the result would be that slight inflation would raise welfare due to the lower income tax rates. At some point, the inconvenience of not using hand-to-hand currency would offset the gains from improved incentives to work and save.

    If the money creation is used to fund some particular kind of government good, then the most likely result is that the relative price of that good rises and the relative prices of other goods fall. Like tanks. More importantly, the production of tanks expand and the production of other goods and services fall. What goods? The goods that would have been bought by those whose real expenditure falls so that they can expand their nominal balances enough to rebuild their real balances.

    Understand that everyone knows about this effect. Too many “Austrians” however, have only a vague understanding of it, and their foggy intuition about it leads them to confuse this with disequilibrium processes.

    There is nothing unsustainable about these impacts of inflation on relative prices and the allocation of resources. The government could fund the purchase of tanks with newly created currency in perpetuity. Gold miners can fund their consumer and investment out of newly mined gold forever.

    However, the size of these effects depends on the amount of the monetary base relative to the rate of base money creation. It really isn’t that much.

    Also, the impact on relative prices and the allocation of resources are not cummulative. The impact on the output of tanks per year is based on the rate of money creation per year, not on the total amount of money created through all time.

  74. Gravatar of Bill Woolsey Bill Woolsey
    3. December 2012 at 05:32

    With a pure credit money system, all money is a form of debt. Unlike the gold miner who finds gold and spends it, or the government issuing pure fiat money that prints money and spends it, everyone who issues money is borrowing money.

    Yes, the money issuers are borrowing money. We can imaging a money issuer borrowing money and then spending it on consumer goods, but the usually, those issuing money by borrowing turn around and lend the money. That is, the money is issued by financial intermediaries–banks.

    Those holding the money, either hand-to-hand currency or deposits, are lending to the issuer. And then the issuer holds a portfolio of earning assets, generally bonds or some other type of loan.

    For the most part, the money issuer earns interest on loans and pays interest on deposits. It makes money on the difference.

    Hand-to-hand currency generally pays no (nominal) interest. Those holding it, and so lending to the issuer, earn no intereset. The issuer earns interest on its asset portfolio. This makes borrowing by issuing currency profitable. (If the yields on earning assets get very low, or the risk of them gets too high, then borrowing by issuing currency is not profitable.)

    If the issue of hand-to-hand currency is monopolized, then the rents generated can be captured by someone. Traditionally, they were divided between the stockholders of a private central bank and the government. The government got its share by paying lower interest rates. Governments have generally nationalized their central banks so that they get all of the gain from having a monopoly issue of currency and borrowing at zero interest. (And we end up with confusion between a pure credit monetary system and a pure fiat system.)

    With competition, the rents get competed away. Lots of ATM machines, lots of tellers and hours at the banks, higher interest on deposits to those likely to use currency, lower interest rates on bank loans relative to bonds, etc.

    Anyway, treating the money lent out by an issuer of credit money just like it is gold found by a miner is a mistake. They don’t get to spend the money on what they want. They just earn the difference between what they earn and pay. And they get this money back in the future. They don’t spend the money “first” before it loses value. They spend the money last.

    What about borrowers? Doesn’t the newly created money allow them to borrow at lower interest rates? Certainly that is possible, but while the increase in the quantity of money is at the same time an increase in the supply of credit, the increase in expected prices of products raises the demand for credit at the same time. With perfect foresight (and this is what rational expectations implies in this situation, I think,) nominal interest rates rise and real interest rates are unchanged.

    “Austrians” generally ignore this effect of higher expected prices of the nominal demand for credit, and so the real interest rate. (This is different from the effect of the expected inflation on the nominal interest rate.)

    The gain from a monopoly credit money issuer is summarized by the real interest rate it pays on currency. With zero inflation, the real interest rate is zero. With positive inflation the real interest rate is negative.

    Now, if it is assumed that the demand for hand-to-hand currency grows at a constant rate and that the rate of inflation is given, the income from a pure fiat currency is going to be the same as the profit from borrowing by a monopolist issuing currency. But that is a very special assumption.

  75. Gravatar of dtoh dtoh
    3. December 2012 at 06:09

    Scott,
    You said,

    dtoh, You are confusing demand for apples (or money) with aggregate demand (NGDP.) When one goes up the other goes down. Less demand for apples means GDP rises in apple terms, just as less demand for money means GDP rises in money terms.

    I think I am confused. I don’t understand what you are saying. What I am saying is that when NGDP goes up, it means the volume of transactions is increasing and therefore (unless velocity increases) you are going to need more money to effect those transactions.

    It makes no sense to argue money balances are small, given that cash is usually 90% plus of the monetary base. Those small cash balances are what drive NGDP when interest rates are positive. We know that expected inflation affects demand for cash, as the cash/GDP ratio is negatively correlated with inflation.

    When I said money balances were small, I was referring to the percentage of total assets held as money by businesses and HNWs…typically only a tiny percent of their overall assets. Thus the impact of expected inflation on their money balances is negligible. What is important is the impact of expected inflation on their assets and liabilities. A company might have $40 million in debt but only $4,000 in cash/bank desposits(pretty typical). Inflation expectations have a big impact on what they do with their debt balances, but it has zero effect on how much cash they hold or fast they spend it. (If inflation was above 10% they might think about it, but at relatively low rates it’s not even on the radar screen).

  76. Gravatar of StatsGuy StatsGuy
    3. December 2012 at 06:36

    ssumner & Nick:

    “I would add that monetary stimulus tends to benefit the unemployed, but that’s because it’s not a zero sum game—it tends to create jobs if the economy is depressed. It might help stockholders and hurt bondholders for the same reason.”

    Actually, it helps CURRENT bondholders and hurts FUTURE bondholders. When the Fed signalled that it was about to buy MBS, you will observe that the price of MBS did not change much after it started the intervention. That’s because people like Bill Gross shifted huge volumes of assets into MBS to bid up the price, then resold them back to the Fed at the higher “market” price. He kept the difference. The point of injection DID matter.

  77. Gravatar of dtoh dtoh
    3. December 2012 at 06:37

    Bill Woolsey,
    Thanks for the multiple good analyses on this thread. The only thing I wonder about is where you say,

    “What about borrowers? Doesn’t the newly created money allow them to borrow at lower interest rates? Certainly that is possible, but while the increase in the quantity of money is at the same time an increase in the supply of credit, the increase in expected prices of products raises the demand for credit at the same time. With perfect foresight (and this is what rational expectations implies in this situation, I think,) nominal interest rates rise and real interest rates are unchanged.”

    I think but I’m not sure that when you are below full employment growth rates, you also have depressed real rates until monetary policy jump starts GDP growth expectations.

  78. Gravatar of StatsGuy StatsGuy
    3. December 2012 at 06:38

    Bob:

    “(B) Admit that what the Austrians mean by “it matters how the money gets into the economy” is a valid point, and that your earlier criticisms were due to a misunderstanding of what they were talking about.”

    Darn, I agree with Bob on something…

  79. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 06:44

    This isn’t ‘good economics’.

    It’s hand waving to make the magic of ‘given data’ assumed in a stipulated construct of thought a magical ‘perfect market’ with ‘perfect information’ with ”peefect expectations’ and perfect learning’ somehow a reality of real life. It’s what Coase calls ‘black board’ economics confused for the real world, and it is the target of all,of Hayek’s papers on the pathology of assuming the real world of imperfect price signals and real competition and rivalry works like a ‘perfect competition’ math construct.

    Bill writes,

    “The gold miner’s good news is announced in the press. Everyone in the economy knows the current money stock is 1000 ounces. They divide the size of the gold strike (100) by 1000 and find get .1 or 10%. Knowing and believing the quantity theory of money, they expect all prices to rise 10%. They immediately mark up their prices accordingly.

    If they don’t set prices but have auctions, then what happens is buyers immediately raise their offer prices in order to beat the expected price increases and sellers immediately raise their ask prices waiting for the higher prices.

    I respect your thorough knowledge of Hayek, but come on. This is basic economics. Basic microeconomics supply and demand is that an expected increase in price results in lower supply and inceased demand, and so, an immediate increase in price. I’m sure Hayek was aware of this as are all economists.”

  80. Gravatar of StatsGuy StatsGuy
    3. December 2012 at 06:53

    ssumner: To elaborate with a more realistic example than Bob’s Tacos…

    All of the examples you cited were purchases or displacements of Federal securities, which are all necessarily close to fungible. However:

    3) According to your view, it doesn’t matter whether the Fed buys a trillion dollars of short term securities, or a trillion dollars of stock, so long as the NGDP target was the same, the difference would be trivial?

    I think there are a lot of people who would disagree with that.

    2) The term length of purchases DOES matter. If the Fed committs to buying only short term securities, and holding as needed, there are potential problems – since they’re essentially the same as cash (near zero interest), this runs up against the DeLong critique – you’re just swapping one zero interest security for another. This only works if there is a VERY believable commitment to keep doing that until the real economy improves. But the effect of this remains indeterminate. We STILL have not shown that buying endless amounts of short term securities to increase bank cash balances is enough to kick start NGDP. If the banks extend long term loans on short term cash balances, with the expectation that rates rise if NGDP improves, they are making a very risky bet (and incurring massive maturity mismatch risk).

    3) By contrast, if the Fed buys long term bank bonds at low interest rates, this risk is alleviated.

    There’s a similar argument with regard to the Fed buying long vs. short term government bonds, although it’s relative to fiscal spending.

    The point is, you are basically arguing that if the commitment is credible, then injection is a trivial issue (largely because little of it will actually happen!). But the mechanism of injection has massive impacts on credibility, and credibility is often not easy (you yourself have noted that the market has consistently overpredicted “inflation”, whatever that is). In the absense of perfect credibility, massive injection does matter, and assets are NOT perfectly fungible.

  81. Gravatar of ssumner ssumner
    3. December 2012 at 06:53

    Andrew, Yes, gold prices would have risen much more, but in the gold example I’m talking about monetary policy when interest rates are not at zero. And this is off topic from the post, in any case.

    JP, Wrong, in normal times the amount of stocks purchased to implement policy would have virtually no effect on equity prices.

    Bob, You said;

    “One more and I’ll leave you alone Scott: On Monday Bernanke announces, “Over the weekend we had a meeting and we’ve decided that instead of buying mortgage-backed securities, from now on we’re going to buy tacos each month.””

    Taco prices would rise, but of course that has no bearing on the post, which was looking at the question of who gets the money first, not what assets are purchased. Obviously if the Fed pays me a billion dollars from my house, I’m better off.

    dtoh, Cash is around 10% to 20% of GDP in Japan, and less than 4% in Australia–so it matters even at low rates.

    Bill, I know that dealers are not paid in cash, my point is that if they were to receive base money, it would have to be cash, as dealers can’t hold reserves. And the deeper point is that it wouldn’t matter if they were paid in cash, as they wouldn’t hold the cash anyway, someone else would end up with the cash. Imagine we go back to pre-1913—the Austrian model should still work, right? Yet the base was 100% cash. So I can talk about cash with no loss of generality.

    Negation, Excellent comment.

    more to come . . .

  82. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 07:00

    ssumner:

    Taco prices would rise, but of course that has no bearing on the post, which was looking at the question of who gets the money first, not what assets are purchased. Obviously if the Fed pays me a billion dollars from my house, I’m better off.

    So…it does matter who gets the money first?

  83. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 07:19

    Bill, mistaking what is ‘given’ the the economist in a ‘given data’ math construct for what the market has to discover and produce via an imperfect groping, signaling, and trial and error learning process, ie you are assuming the problem which the imperfect market and imperfect price signals and imperfect market learners achieve is already *solved* by stipulated assumption in the stipulated ‘given data’ of the math construct — EXACTLY the assumption Hayek attacked in his work on social planning and in his work on business cycles, and which is the focus of his famed papers on the signaling function of prices and the learning and discovery function of competition.

    Hayek identifying and clarification of this mistaking of the ‘given data’ construct for the actual, real process of the market as his greatest contribution to economic science, and he insisted to his dying day that ‘neoclassical’ economists had *fail* to comprehend the signal function of prices and the role of learning and discovery in the market process, because of their bewitchment by math constructs build of ‘given data’.

  84. Gravatar of ssumner ssumner
    3. December 2012 at 07:19

    Greg, Now you are getting laugh out loud funny. So Richman really meant to say that other economists who are not Austrian economists fail to analyze non-neutrality of money is precisely the same way that Austrian economists analyze the non-neutrality of money. And all the readers will nod their heads and think “Oh my God! The non-Austrian economists don’t even know that money is non-neutral.” Enjoy life in your bubble!

    Bill, I agree with your longer comment on the gold miner.

    Mike, Except that OMOs are expected (by the financial markets) to be inflationary, which is what your model can’t explain.

    Saturos, When they were students they were taught that things like operation twist have almost no effect. My hunch is that they agree with me that it has almost no effect, but think that the tiny effect it will have is useful. BTW, nothing in my post depends on whether I am right on that issue, as I am considering the question of who gets the money first, not what is purchased (which is a more debatable point.)

    You said;

    “Yes, Friedman was wrong in emphasizing the flow demand for bonds along with the stock equilibrium for the portfolio decision, it’s the latter that really drives interest rates. The Keynesians are correct about that.”

    Friedman would probably say that monetary stimulus can create a flow demand for lots of other assets, and I agree. But that demand comes from the fact that NGDP is expected to rise, not because of the particular asset being purchased. Yes the direct effect is there to some extent, but it’s trivial compared to the indirect effects. I’m quite sure Friedman would have agreed.

    dtoh, But you are ignoring the question of why inflation rises in the first place–that can only be explained by changes in the market for that tiny quantity of base omeny, not the much bigger asset superstructure, which is endogenous.

    Statsguy. If you are implying that easy money favors bond holders like Gross, then I disagree. He’s done very well during the 30 year bull market for bonds caused by tight money which as reduced inflation from 10% to less than 2%.

    You said;

    “According to your view, it doesn’t matter whether the Fed buys a trillion dollars of short term securities, or a trillion dollars of stock, so long as the NGDP target was the same, the difference would be trivial?”

    Of course that’s not my view, that would be an idiotic claim. I’m claiming that if the Fed injects money by reducing the debt held by the public, then it makes little difference who gets the money first (bond dealers, banks, gov. employees, etc.) Please reread my post. I also claim that if the Fed does a modest amount of asset purchases when interest rates are positive (say a few billion), the effect of the increase in the base completely dwarfs any effects due to picking stocks or bonds or forex as the asset to be purchased. I doubt you’d find any reputable economist who disagreed with either claim. Or should I say “No true Scotsman . . . ” :)

  85. Gravatar of StatsGuy StatsGuy
    3. December 2012 at 07:24

    Ssumner/Negation:

    “Do “Austrians” think that was some kind of special benefit to those [long term] bondholders? Wasn’t the government planning on eventually paying those bonds when they came due anyway?”

    Yes, there was. Paying these bondholders off early accelerated their appreciation dramatically, allowing them to trade over to other assets.

    The argument that “they’ll get paid anyway” assumes that all bondholders roll over assets into similar bonds upon maturity, and/or hold to maturity.

    But if this were true, then by definition the Fed would not even be able to conduct OMO because no one would sell their bonds (and/or there would be no bonds to purchase, except new issues).

    The four examples Scott cites are picked to specifically avoid the issue of non-fungibility. Term structure (long vs. short), sectoral allocation (which bonds, Treasury MBS or Corporate), and risk absorption (bonds, or stocks?) clearly DO have an impact.

  86. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 07:29

    For all the world this simply looks like a matter of not getting Richman’s point.

    “Taco prices would rise, but of course that has no bearing on the post, which was looking at the question of who gets the money first, not what assets are purchased. Obviously if the Fed pays me a billion dollars from my house, I’m better off.”

  87. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 07:31

    Bill Woolsey:

    Anyway, treating the money lent out by an issuer of credit money just like it is gold found by a miner is a mistake. They don’t get to spend the money on what they want. They just earn the difference between what they earn and pay. And they get this money back in the future. They don’t spend the money “first” before it loses value. They spend the money last.

    Not necessarily. While it’s true they don’t spend the money first, that doesn’t mean they spend it last. They could spend it second, third, fourth, and so on, much sooner than last.

    What about borrowers? Doesn’t the newly created money allow them to borrow at lower interest rates? Certainly that is possible, but while the increase in the quantity of money is at the same time an increase in the supply of credit, the increase in expected prices of products raises the demand for credit at the same time. With perfect foresight (and this is what rational expectations implies in this situation, I think,) nominal interest rates rise and real interest rates are unchanged.

    OK, but how about in the real world without perfect foresight? Where people make mistakes? Where people disagree?

    “Austrians” generally ignore this effect of higher expected prices of the nominal demand for credit, and so the real interest rate. (This is different from the effect of the expected inflation on the nominal interest rate.)

    They don’t ignore that effect, they just consider it less than important than you do. Less of an effect. Austrians hold that while future price inflation expectations can encourage people to set somewhat higher prices in the present, it must be understood that any additional price increases can only be financed out of the individual’s existing cash balance. If the individual is already at their “limit” of cash holding, then even if they expected price inflation to increase in the future, they will not be adding nominal demand to their spending in the present, and so the prices they pay won’t rise to that extent, and not only that, but their own income may not necessarily rise sufficiently either because the buyers they trade with don’t add to their nominal demand. In short, just because people expect higher price inflation in the future, it doesn’t mean they have the cash in the present to pay the higher prices.

    In the sterile, unrealistic model driven approach you take, you fail to grasp that inflation money has to work its way throughout the economy from bank balance to bank balance first before it can actually be spent by the individuals who set prices further down the line. I cannot spend more money unless my income rises. But my income cannot rise unless my buyers spend more money. But they cannot spend more unless their buyers spend more money. And so on, back up the inflation line the other way, all the way back until inflation first entered the economy.

    Right after inflation first enters the economy, millions of people down the line must wait, for a period of time, for the inflation money to raise their nominal income before they can add more to their spending and raise the prices that such inflation was designed to do.

    Your model is not taking into account TIME in inflation mechanics. To you, inflation somehow is able to instantaneously raise all prices by 2 or 3% or whatever. That is not how inflation works!

  88. Gravatar of StatsGuy StatsGuy
    3. December 2012 at 07:32

    Scott – On those four cases, I agree with you, and I agree with your general point that the AD effect is bigger than the distributional effect in the real world, but those four cases don’t support the breadth of the title of the post… That title is a strong claim.

  89. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 07:38

    This? Really? Honest men don’t play games like this, Scott.

    Scott writes,

    “Greg, Now you are getting laugh out loud funny. So Richman really meant to say that other economists who are not Austrian economists fail to analyze non-neutrality of money is precisely the same way that Austrian economists analyze the non-neutrality of money. And all the readers will nod their heads and think “Oh my God! The non-Austrian economists don’t even know that money is non-neutral.” Enjoy life in your bubble”

    I don’t assume Richman knows the modern literature on the neutrality of money — you’ve implied that yourself, already, Scott.

    When cornered, PUNT!

    Change the assumption, obfuscate.

    This is really disgusting, Scott.

  90. Gravatar of Arthur Arthur
    3. December 2012 at 07:47

    But choosing to buy T-bills instead of other stuff doesn’t raise demand for t-bills, raising the purchasing power of t-bills?

    Fed’s demand for t-bills would raise the price of t-bills relative to other stuff, wound’t it?

    This effect could be small, but the fed really seems to change t-bills price, so maybe it’s not.

  91. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 07:58

    ssumner:

    Greg, Now you are getting laugh out loud funny.

    Greg, being laughed at probably means you are getting close to where Sumner isn’t able to go (for obvious reasons). You must be on the right track.

    So Richman really meant to say that other economists who are not Austrian economists fail to analyze non-neutrality of money is precisely the same way that Austrian economists analyze the non-neutrality of money. And all the readers will nod their heads and think “Oh my God! The non-Austrian economists don’t even know that money is non-neutral.” Enjoy life in your bubble!

    Speaking of bubbles:

    “What we actually need to do is start with the concept called “the neutrality of money,” which underlies almost all of macroeconomics, and has done so for hundreds of years. This says that an increase in the monetary base will not affect any real aggregates, and hence all nominal aggregates will rise in proportion.”

    “The neutrality of money (and the money multiplier) are long run propositions.”

    A non-Austrian saying money is neutral, telling someone partial to Austrianism that economists understand money is non-neutral.

    I have some fog machines to sell you in San Francisco.

    I’m claiming that if the Fed injects money by reducing the debt held by the public, then it makes little difference who gets the money first (bond dealers, banks, gov. employees, etc.) Please reread my post.

    You mean where you said if the Fed buys your house, rather than bonds, you would benefit?

    I also claim that if the Fed does a modest amount of asset purchases when interest rates are positive (say a few billion), the effect of the increase in the base completely dwarfs any effects due to picking stocks or bonds or forex as the asset to be purchased. I doubt you’d find any reputable economist who disagreed with either claim.

    So…you admit there is an effect on the prices of the assets purchased during “normal times”, and that during times when interest rates are…not positive(?) the effect is not “dwarfed” by the base?

    Well, that effect that you say is “dwarfed” during times when interest rates are positive (as opposed to the magical times when interest rates are negative), is sufficient to altering relative prices to such a degree that the business cycle is brought about, as millions of individuals are unable or unwilling to maintain the crude aggregate price model you use that sees all prices moving in perfect tandem with inflation.

    1% added to annualized NGDP growth? That supposedly means every single individual, at the same time, spends 1% more annualized. Or, perhaps you’ll say of course not, but that these differences are “dwarfed” by some other red herring meant to divert attention away from the conceded point.

    Or should I say “No true Scotsman . . . ”

    How about Ad Populum? Appeal to authority? “Reputable” economists are, and have been many times in the past, incorrect. Fisher was “reputable”. Keynes was “reputable.” I doubt that you would find any “reputable” economist in the 1920s who would agree with you if you were alive back then. If you can’t justify a particular argument, then it’s better to say it’s a guess, rather than depending on the mob and seemingly saying “ask them, not me”.

  92. Gravatar of Morgan Warstler Morgan Warstler
    3. December 2012 at 08:08

    Good lord, Scott ALREADY admitted it!

    When the Fed shows up to buy $40B inT-Bills, the guy selling the T-Bills, GOLDMAN SACHS gets to sell for more than they would have sold for.

    GS has made a profit.

    Now then, the MORE INSIDE KNOWLEDGE that GS has to this, the more GS can model their portfolio to exploit it.

    Scott ALSO has to eat profits made by even illegal inside knowledge.

    Now we’ve GS with extra free money and they are stuck shopping for something else to buy…

    AND the guy who was going to buy the T-Bill the Fed bought, he’s in same boat.

    The issue here is that NONE of these first boats, that are all rising, own a 30 man landscaping business in Georgia.

    —–

    The moral argument is not whether this is a big deal in grand scheme of things.

    The moral argument is that the free market economic system SHOULD ALREADY BE WEIGHTED TO FAVOR the landscaper.

    The govt. and Fed should be INEFFICIENT if need be to favor the small.

    In the long run, favoring the small leads to smaller government. And THAT is the moral good, the operable voting issue.

    Scott lost the argument when he admitted it didn’t outright favor SMBs.

  93. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 08:09

    David Glasner, of whom I have disagreed with about other things, nevertheless nails it on money non-neutrality:

    “First, most agree as David Hume explained over 250 years ago that changes in the quantity of money do have short-term real effects. The neutrality of money is thus usually presented as a proposition valid only in the long-run. But there is clearly no compelling reason to think that it is valid in the long run either, because, as Keynes recognized, the long run is a succession of short runs. But each short-run involves a variety of irreversible investments and irrevocable commitments, so that any deviation from the long-run equilibrium path one might have embarked on at time 0 will render it practically impossible to ever revert back to the long-run path from which one started. If money has real short-term effects, in an economy characterized by path dependence, money must have long-term effects. Real irreversible investments are just one example of such path dependencies. There are also path dependencies associated with investments in human capital or employment decisions. Indeed, path dependencies are inherent in any economy in which trading is allowed at disequilibrium prices, which is to say every economy that exists or ever existed.”

    http://uneasymoney.com/2012/06/19/money-is-always-and-everywhere-non-neutral/

  94. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 08:15

    Well, they don’t.

    “other economists who are not Austrian economists fail to analyze non-neutrality of money is precisely the same way that Austrian economists analyze the non-neutrality of money.”

    And fundamentally, Richman is aware of it, whether or not he is an expert on the post-Patinkin literature on the neutrality of money.

    And his argument turns on the insight contained in this important, rival causal understanding of things.

    A difference of understanding which Scott repeatedly show zero awareness of or understanding of.

    You, Scott, would rather belittle people and insult their intelligence than engage the rivalry of alternative causal explanatory understandings or mechanisms.

    There is a reason I brought up the role of the principle of charity in this, why I brought up Thomas Kuhn and how alternative explanatory rivals use a shared vocabulary with rival causal significance, etc.

    There is a different way of causally seeing things, and rather than acknowledge that signal fact, and dealing with it straight up, honestly and genuinely, you play games, assert things which are false, belittle people on false grounds, etc.

    Well, people can behave however they’d like. Paul Krugman proves that every day.

    But what is the point?

    If the point isn’t to achieve understanding, what is it?

    With Krugman, it’s clear is aims are not cognitive, he’s bullshitting us for purposes that have nothing to do with a respect or interest in understanding things, getting at the truth, engaging in a productive conversation, etc.

    When you come after ‘Austrian’ or ‘Austrian’ cycle ideas, you, Scott, get down on all fours with Krugman — you spread ignorance, celebrate ignorance, engage in nasty marginalization efforts with zero spirit of good will or cognitive charity.

    It’s a real record to be proud of.

    And there is an established record — falsehoods you’ve acknowledged happily spreading even after being given a direct heads up of your un-informed guesswork.

    You are on record getting this stuff fabulously wrong — and doing so repeatedly, and for long periods showing essentially zero no interest in correcting yourself or getting it right when informed of the problem. That is your established and documented MO.

    Own it.

  95. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 08:32

    Morgan:

    When the Fed shows up to buy $40B inT-Bills, the guy selling the T-Bills, GOLDMAN SACHS gets to sell for more than they would have sold for.

    GS has made a profit.

    I agree with you, but Sumner would claim that GS gets “the market price” if the Fed announces it will buy t-bonds at whatever price prevails. Yet that contradicts his other claim where he said the price of t-bonds will rise from what they otherwise would have been (but be “dwarfed” by other causes, but that isn’t even relevant).

    It’s not so much about Sumner admitting that there are relative price effects, it’s the blatant contradiction where the prices would rise, and yet they won’t rise because the Fed supposedly pays the “market” price.

    ——————

    I think I have the easiest way to see that the relative price changes are not “dwarfed” at all, but are as significant as CPI index levels: If one understands that monetary inflation is what is being used to raise the CPI (which represents the prices of a basket of goods), then one can understand that this cannot occur unless the initial goods/securities bought by the Fed also rise in price. You cannot go from initial inflation injection points to the CPI increasing UNLESS there are a series of price increases along the way, in the dispersing paths of money spending as the money spreads throughout into people’s bank balances. Prices are a function of supply and demand. If more money is being spent, then prices rise from what they otherwise would have been. If aggregate price levels are going to be higher, then so must the initial prices where inflation entered the economy, be higher. The initially increasing prices are the “transmission” to subsequent price increases that eventually lead to an increasing CPI.

    If the Fed really did pay “market” prices for the goods/securities it purchased, then that would imply that all subsequent spending by the banks is market price driven as well, which would imply that the CPI is market price driven, which would imply inflation is not caused by the Fed, but by the market process! Now that’s funny.

  96. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 08:46

    Greg:

    If the point isn’t to achieve understanding, what is it?

    Where have you been? The point is to control people by the force of a centralized criminal gang intellectually guided by philosopher kings.

    Or, equivalently, to influence the philosopher kings so as to change the intellectual guiding of the centralized criminal gang that controls people by force.

    It’s the same ancient mentality springing up since at least Plato. BTW, no less than nine of his followers tried, unsuccessfully, to set up various fascist city states around Greece and Thrace, with each follower as philosopher king.

    Going deeper, it’s the notion that idealistic concepts (e.g. NGDP) are the real reality, and the Earthly empirical phenomena (the “boring, dull” micro-economics) are but mere “reflections” of the true reality.

    The ideal would be if every individual behaved as NGDP man, that is, each individual earned and spent 5% more money each year, without a central bank. Of course, because man is “imperfect”, they “fail” to live up to ideal NGDP man, so the force of a centralized gang is justified in controlling people so that “society as a whole” spends 5% more each year.

  97. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 08:55

    If anyone dares trying to resist this “ideal society” imposed on their own body and property by force, then they will be thrown into a cage by the very same thugs intellectually guided by the philosopher kings. If they resist the cage, then they will be shot at and killed.

    Wonderful ideology isn’t it?

    How can you possibly be offended at market monetarism? It has your interests in mind. Don’t be an ideologue (Austrian). Be an ideologue (Market Monetarist).

  98. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 09:27

    “Greg, Just as I predicted it was all bluster on your part. You can’t give me an alternative definition of non-neutrality that would make Richman right. It was all a bluff on your part, just as I predicted. Next time don’t try to slip one past me–I’ll call you on it.”

    ?????

    I constantly put substance on the table, red-flag roadblocks to communication & understanding, seek out indications of shared understanding.

    And from Scott? Lots of punting & smoke & mirror distractions.

    Unending diverting of the conversation into empty cul de sacs.

  99. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 09:44

    Peter Boettke flags how Scott’s failure to recognize the significance of the fact of two different causal explanatory worlds is at the core of your failure to ‘get’ Sheldon Richman:

    “I’d like to see an honest and thorough debate on these issues. At a fundamental level I think the debate isn’t empirical but analytical, and a consequence of the very Keynesian style of theorizing that Hayek and Buchanan wrote against. It is just very difficult for economists trained since 1950 to think consistently in a framework that does not permit “macro” aggregation. Or, as Roger Garrison has put it over the years, ‘While there may be macroeconomic problems (inflation, unemployment, business cycles), there are only microeconomic explanations and solutions.” In other words, the only economics that works is relative price economics. But the ability of economists to think consistently and persistently in relative price economics terms is difficult and it is easy to slip into the habit of aggregative thinking, such as price levels, etc. The old habits of thoughts which stifile thought, as Keynes once wrote about classical economics, have now become Keynesian habits. In all sincereity, I don’t want to assert this as the definitive answer, but only as the beginning of the conversation. But how else would you explain Scott Sumner’s discussion of injection effects, or David Beckworth’s discussion of monetization (btw, see last sentence to paragraph 2 for answer to his question about the empircs)?”

    More:

    “Confusion in science always results when people use the same words to mean different things, and different words to me the same thing. So I know I am risking confusion. But this is why I use the analogy to the transformation that economics took as a result of Keynes. Even market oriented thinkers I am contending are trapped in the habits of thought wrought by Keynesianism. This is why the insights of a Buchanan or Hayek are not fully appreciated and incorporated, though they are paid lip-service too.”

    I wouldn’t put things exactly as Peter has worded them, but the point he makes is the core issue.

    Anyone but someone with a fake interest in his expressed expressed question of why Richman was saying such things, would want to get a handle on what Boettke is explicitly identifying as the core of the matter.

    Interested in the core of the matter?

    Or is it more distracting rhetoric on our menu today?

  100. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 09:45

    Boettke’s blog post:

    http://www.coordinationproblem.org/2012/12/democracy-in-deficit-and-holding-a-tiger-by-the-tail.html

  101. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 09:59

    Greg:

    FTA:

    But the ability of economists to think consistently and persistently in relative price economics terms is difficult and it is easy to slip into the habit of aggregative thinking, such as price levels, etc.

    No truer words.

  102. Gravatar of Doug M Doug M
    3. December 2012 at 09:59

    There seems to be a very poor understanding of how money is crated and how open market operations work.

    Lets suppose that there is one central bank and one private bank.

    The central bank prints up $1,000,000 in new currency (real paper 1, 5, 10, 20, and 100 dollar bills) and by some means distributes this cash to the citizenry. Much of this cash will change hands to buy goods and serivices, but eventually nearly all of this cash will be depositied in the bank. The bank sets aside a fraction to hold as reserves against these deposits, and loans the rest out as consumer loans, mortages, business loans, and loans to the federal power. This money is again spent and finds its way back to the bank. The money supply is now 1.9 million dollars. The bank again sets aside reserves and loans what is left. M1 = $2.8 million.

    Lather, rinse, repeat, for every dollar that the fed creates — and it doesn’t matter where it creates it, that money finds its way into the banking system and the banking system creates potential $10. The central bank can then buy assets from the private bank, and once again increase the reserves of the private bank. They loan the money, the money is depostited bank in the private bank and loaned again. The huge leverage that the banking system gives the Fed is a big part of the reason why monitary stimulus can be so powerful.

  103. Gravatar of dtoh dtoh
    3. December 2012 at 10:09

    Scott,
    You said,

    “But you are ignoring the question of why inflation rises in the first place–that can only be explained by changes in the market for that tiny quantity of base omeny, not the much bigger asset superstructure, which is endogenous.”

    No I don’t think I am. (Ignoring supply shocks), inflation rises when demand exceeds short term supply capacity. If RGDP growth is 1% and unemployment is 8%, an injection of money will have a very different effect on inflation then it will have if RGDP is growing at 5% and unemployment is 4%.

  104. Gravatar of Doug M Doug M
    3. December 2012 at 10:11

    Bill Woolsey….

    “Suppose gold solely serves as money, and the quantity of money is 1000 ounces. A miner discovers 100 ounces. The price level immediately rises 10%, before the miner spends anything.”

    Does it? Suppose the miner keeps his strike a secret. He spend a chunk of it before prices began to react.

    But suppose he goes straight to the tavern and yaps his head off about it, do drink prices go up? If it is an open economy, then new shovels and blue jeans and hooch and tins of beans flow into the economy and the “surplus gold” flows out, and prices are little changed for all of the activity.

    But even if the economy is completely closed and there is good information. The miner is now the richest man in town with 10% of the money supply. Can the barkeeper really afford to raise the price of drinks 10%? The miner may have an increased demand for alcohol at the current price level, but the rest of the patrons do not. Aggregate demand for alcohol has only slightly increased. The saloon keeper has to set his price at a level where supply meets demand. Now, as that miner spends his gold eventually prices will inflate, but it will not be until a good fraction of that gold has circulated.

  105. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 10:18

    Doug M:

    The miner is now the richest man in town with 10% of the money supply. Can the barkeeper really afford to raise the price of drinks 10%? The miner may have an increased demand for alcohol at the current price level, but the rest of the patrons do not. Aggregate demand for alcohol has only slightly increased. The saloon keeper has to set his price at a level where supply meets demand. Now, as that miner spends his gold eventually prices will inflate, but it will not be until a good fraction of that gold has circulated.

    That is a point that seems to be going woefully unappreciated here. Why is it so hard to grasp that prices are a function of exchanges, and the money in exchanges can’t go up until the individuals paying the money receive more money from others prior? Inflation is a temporal phenomena. Folks like Woolsey and Sumner are talking as if all prices can instantly rise right after Bernanke buys $40 billion in MBS. But a person can’t pay more until their income grows, and that takes time because inflation is transmitted via exchanges from party to party, not via manna from heaven or dropped by helicopters.

  106. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 10:19

    That is the core reason why relative price economics needs to be taken more seriously.

  107. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 10:49

    Doug M — you are cheating. You are thinking economically, while talking to an macroeconomist, whose whole “scientific” game consists in dodging the imperative to think economically.

  108. Gravatar of Floccina Floccina
    3. December 2012 at 11:56

    But don’t T-bill holders benefit more that others? Wouldn’t it be better if instead banks were buying the most undervalued assets?

  109. Gravatar of Max Max
    3. December 2012 at 12:05

    Mike Sproul,

    I think (very unsure) that Scott and other monetarists are assuming binding reserve requirements, so that the quantity of base money limits the quantity of derivative money. This would explain why they believe that purely “quantity” operations have an effect.

  110. Gravatar of Doug M Doug M
    3. December 2012 at 12:09

    Floccina,

    Who is to say what the most undervalued asset is? Are you suggesting that the market prices are wrong? or the market is inefficient?

    Okay, so you believe that the market is inefficient… Is it “right” to put risky assets on the Fed’s balance sheet? Why should we accept this socialization of the risk?

    So, you made it through those questions… does it make a difference? According to Sumner (and I happen to agree with him), no (or insignificantly).

  111. Gravatar of Suvy Suvy
    3. December 2012 at 12:55

    “It makes very little difference how money is introduced.”

    This is complete garbage. For every dollar that’s printed, it takes away from my purchasing power. By printing money and stashing them in bank reserves, the banks gain spending power at my expense. Inflation is a tax; printing money is a tax. The first people to get the new money benefit the most. If the banks get the money first; they benefit the most at my expense. It makes a huge difference on how the new money is introduced.

    You miss one important detail; that every money printed is a devaluation of every dollar in my pocket. If I have debt, then I benefit; but if I don’t and I’m a prudent saver, I get killed.

  112. Gravatar of Razer Razer
    3. December 2012 at 13:12

    Just in this thread alone, the “theory of quantity of money” has been soundly refuted. Does market monetarism rest of this absurd theory?

    PS. Can it even be called a theory? Theories in science are used to explain all the facts of a phenomena. This sounds like a hypothesis that is easily falsified. Only a bias confirmer would cling to anything that rests on this “theory.”

  113. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 13:27

    Scott, in your world, during the hyperinflation in Germany in the 1920s, did it matter who got the money first?

    Was the ‘neutrality of money’ maintained in whatever sense you mean it when you argue that it doesn’t matter who got the money first?

    You seem to be saying that who gets the money first make no difference of some sort.

    Or you are saying that it is impossible for anyone to get the money first.

    Which is it in the case of the German hyperinflation.

    During lead up to and into the progression of the German hyperinflation, did no-one get the money first?

    And was the neutrality of money maintained across the 1920s in Germany?

    Just trying to get a sense of what you are claiming, across this divide of alternative conceptual explanatory schemes.

  114. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 13:41

    Suvy:

    You miss one important detail; that every money printed is a devaluation of every dollar in my pocket. If I have debt, then I benefit; but if I don’t and I’m a prudent saver, I get killed.

    This is incorrect.

    If you have debt, then inflation into banker’s pockets does not benefit you. You still owe the same nominal principle and interest. The only way you as an indebted person are benefited by inflation is if your INCOME is increased because of inflation, which makes it easier for you to pay off your debt. In other words, debt has nothing to do with you being benefited by inflation or not. It’s your income that is crucial.

    For example, suppose you make $50,000 a year, and you owe $50,000 in debt. Suppose also that the prices of goods you buy can be represented as 1.00. That is, the price level is 1.

    If inflation takes place, raising the price level to 1.03 say, and your nominal income does not increase, then your standard of living falls, because while you are still making $50,000 a year, and while you still owe $50,000 in debt, the prices of the goods you buy increases, from 1.00 to 1.03.

    Don’t get confused into thinking that because you were taught that inflation reduces the “value” of a fixed debt obligation, that it somehow ipso facto implies that the debtor is benefited by inflation. It is not the case. Inflation would make debtor’s lives worse off, if their nominal income does not rise.

  115. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 13:42

    Razer:

    Just in this thread alone, the “theory of quantity of money” has been soundly refuted. Does market monetarism rest of this absurd theory?

    It depends on how you state the quantity theory of money. If I state it as follows:

    “If the quantity of money increases, and the demand for money remains the same, then the purchasing power of money will fall.”

    That version has not been refuted on this thread.

  116. Gravatar of Does it make any difference how money is injected into the market? Sumner and the Cantillon Effect « Punto de Vista Economico Does it make any difference how money is injected into the market? Sumner and the Cantillon Effect « Punto de Vista Economico
    3. December 2012 at 13:57

    [...] The Money Illusion a long and interesting discussion is still taking place around a post by Scott Sumner on monetary effects after a monetary injection of money into the market. Sumner [...]

  117. Gravatar of Suvy Suvy
    3. December 2012 at 14:40

    Major Freedom

    “If you have debt, then inflation into banker’s pockets does not benefit you. You still owe the same nominal principle and interest. The only way you as an indebted person are benefited by inflation is if your INCOME is increased because of inflation, which makes it easier for you to pay off your debt. In other words, debt has nothing to do with you being benefited by inflation or not. It’s your income that is crucial.

    For example, suppose you make $50,000 a year, and you owe $50,000 in debt. Suppose also that the prices of goods you buy can be represented as 1.00. That is, the price level is 1.

    If inflation takes place, raising the price level to 1.03 say, and your nominal income does not increase, then your standard of living falls, because while you are still making $50,000 a year, and while you still owe $50,000 in debt, the prices of the goods you buy increases, from 1.00 to 1.03.

    Don’t get confused into thinking that because you were taught that inflation reduces the “value” of a fixed debt obligation, that it somehow ipso facto implies that the debtor is benefited by inflation. It is not the case. Inflation would make debtor’s lives worse off, if their nominal income does not rise.”

    You’re right on this. One thing printing money does is that it increases the amount of turnover of money. Theoretically, it should devalue the real amount that you owe to the debtor, but you’re right, if your nominal income does not rise; the debtor is worse off.

    That being said, in a situation where you have an economy with this much debt; the standard of living will fall regardless. There are two solutions, both of which are painful. One being some sort of a debt jubilee/debt restructuring or you can simply print the debts away. If you restructure the debts, one person’s liability is another person’s asset so asset prices collapse. If you print the debts away(by increasing everyone’s nominal income), the cost of living will probably increase more than their incomes do.

    I think you’ll agree with me on this: when you have this much credit expansion, there is no other option than to have our standard of living fall. We’re basically screwed regardless of the situation.

  118. Gravatar of Morgan Warstler Morgan Warstler
    3. December 2012 at 14:51

    Who gets the new money:

    http://www.morganwarstler.com/post/37140255525/who-gets-the-new-money

  119. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 15:16

    Suvy:

    I think you’ll agree with me on this: when you have this much credit expansion, there is no other option than to have our standard of living fall.

    I do agree with that. I will only add that the “screwing” occurred in the real economy during the credit expansion induced “boom.”

  120. Gravatar of Scott Sumner and I Have a Failure to Communicate Scott Sumner and I Have a Failure to Communicate
    3. December 2012 at 15:28

    [...] with the “top income tax rate in 2013″ debacle. Can somebody read the exchanges between Sumner and me in this post–responding to a Sheldon Richman article–and tell me what the heck is going [...]

  121. Gravatar of RPLong RPLong
    3. December 2012 at 16:38

    I’ve never seen Sumner lose his cool like that before, and he did it right from the very beginning of Greg Ransom’s comments. I can’t say that Greg was the clear winner, because I already agreed with him before he commented, so I’m in no position to judge. But even StatsGuy pointed out that Sumner’s claim was a HUGE overreach.

    Not a good day for Market Monetarists, ha ha…

  122. Gravatar of Iván Carrino (@ivancarrino) Iván Carrino (@ivancarrino)
    3. December 2012 at 16:58

    Scott, if you deny that Cantillon Effect exists. What is the problem with inflation?

  123. Gravatar of Bill Woolsey Bill Woolsey
    3. December 2012 at 16:58

    Basic MICRO:

    If the price of _a_ good is expected to rise, the supply of that good falls and the demand for that good rises. There is immediately a shortage of the good, and its price immediately rises.

    Example–expectation of higher oil prices in the future result in higher oil prices today.

  124. Gravatar of Scott Sumner and I Have a Failure to Communicate – Unofficial Network Scott Sumner and I Have a Failure to Communicate - Unofficial Network
    3. December 2012 at 17:28

    [...] with the “top income tax rate in 2013″ debacle. Can somebody read the exchanges between Sumner and me in this post–responding to a Sheldon Richman article–and tell me what the heck is going [...]

  125. Gravatar of Bill Woolsey Bill Woolsey
    3. December 2012 at 18:06

    “Another doctrine Austrians reject is the notion that individuals can pay higher prices for goods before they receive the new money created prior.”

    Which Austrians make this claim?

    Mises? Hayek?

    I doubt they would make such an obvious error.

    You are assuming that firms produce output and then auction it off.

    Firms can and do raise their ask prices. The can sell less now expecting to make up for it by selling more later.

    People can spend more of their “old” money now, (trying to avoid the decrease in its purchasing power) expecting to get the money back later when their selling prices rise.

    Anyway, suppose new money is spent on good A and the price rises. Some of those who would have purchased good A with “old” money are deterred by the higher price and instead use their “old” money to purchase good B. The price of good B rises.

    Tracing “new” money through the economy is wrong headed.

  126. Gravatar of ssumner ssumner
    3. December 2012 at 18:19

    RPLong, Did you even read Greg’s first comment? If so, you must pretty dense if you think it he was being reasonable. It really doesn’t matter whether you think I win the debate because out there in the real world most economists view the ideas Greg espouses (and which you say you support) as being too silly to even spend time refuting. He should consider himself lucky that I still reply, despite his juvenile and insulting writing style, I doubt any other serious blogger even pays any attention to him. Unfortunately whenever I do a post that even touches on some sort of Austrian (or MMT) idea, the lunatics come out of the woodwork and fill up my comment section.

    The idea that it matters who gets the money first is the economic equivilent of creationism or global market denial. People here seem to take it seriously, but I can’t imagine why.

    Suvy, You said;

    “This is complete garbage. For every dollar that’s printed, it takes away from my purchasing power. By printing money and stashing them in bank reserves, the banks gain spending power at my expense. Inflation is a tax; printing money is a tax. The first people to get the new money benefit the most. If the banks get the money first; they benefit the most at my expense. It makes a huge difference on how the new money is introduced.”

    If getting money is such a great deal, have you ever thought of going to an ATM machine? And be sure to get in line first, before the other guy gets the money. This is really getting silly. No one denies that printing money debases the existing currency, but the gain goes to the government, it’s called seignorage. The gain doesn’t go to the person getting the money, otherwise anyone going to an ATM machine would get the same “gain.”

    dtoh, Have you checked the inflation rate of 1933-34? Inflation doesn’t come from shortages, it comes from printing too much money. You can have hyperinflation during periods of mass unemployment.

    Greg Ransom, I really can’t figure out if it’s all an act on your part, a big joke, or if you are just completely delusional. Sincerity? Charitable reading? I don’t think I’ve ever come across a less charitable commenter in my life, except for MF of course. I’m just going to assume you are joking and leave it at that. The alternative is too depressing.

    OK, I’ll play along with the joke. Yes indeed, Hayek was the only economist who understood the signal function of prices, the rest of us were completely in the dark until you enlightened us with that pearl of wisdom.

  127. Gravatar of Morgan Warstler Morgan Warstler
    3. December 2012 at 20:18

    To move the ball down the field:

    1. Lets get over the fact that the Fed buying all these T-Bills advantages both Goldman AND the US Govt.

    let’s all stipulate thats true. Scott already has.

    2. Since it is true, the interesting question is who should get the newly printed money instead?

    Because that might be a nice middle ground. Scott doesn’t really care who gets the money first. And I assume the greg / MF faction will at least agree that IF the money is going to go to someone first… it shouldn’t be the Fed buying US bonds from Goldman Sachs.

    For sure if the Fed just starts buying securities, art, real estate, then the market turns bearish on US Debt.

    And that has some awesome implications right?

    If the Govt. suddenly has a higher cost of borrowing, that triggers / rejiggers all kinds of winners and losers.

    Right?

    right.

  128. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 20:55

    Scott writes,

    “[Greg] should consider himself lucky that I still reply.”

    Scott, you *don’t* reply. You have no replies. If you have competent, substantive replies, where are they?

    You repeat falsehoods, ascribe views that people don’t hold, and build side distractions. And inject insults and put downs of things you never, ever show enough competence in to address, but feel compelled to bash.

    What a lucky guy I am.

  129. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 20:57

    Is this a semantic game?

    The whole question is about the flow of money, credit expansion, purchasing power, asset value increases, etc.

    Scott writes,

    “The idea that it matters who gets the money first is the economic equivilent of creationism or global market denial. People here seem to take it seriously, but I can’t imagine why.”

    As far as I can tell, this who conversation is based on Scott’s uncharitable and *false* reading of what Sheldon Richman was talking about.

    NOTHING MORE.

  130. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 21:02

    More insults.

    When you write trash on Hayek, I point it out.

    That is all.

    You’ve even acknowledged having written false trash on Hayek from time to time.

    Did you forget?

    And you’ve backed off some of your most absurd assertions, adopting the views I’ve argued here. (Remember backing off your claim that a healthy economy even years down the road needed get itself back on the ruler on a graph extension an ancient NGDP curve from years and years in the past?)

    Scott writes,

    “I do a post that even touches on some sort of Austrian (or MMT) idea, the lunatics come out of the woodwork and fill up my comment section.”

  131. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 21:20

    Scott writes,

    “OK, I’ll play along with the joke. Yes indeed, Hayek was the only economist who understood the signal function of prices, the rest of us were completely in the dark until you enlightened us with that pearl of wisdom.”

    Scott, let’s see if I’m joking. Try playing my fun little game.

    Why did most economist think that Lerner & Lange won their debate with Hayek on the planned economy? What according to Hayek what had gone wrong in the thinking of economists who believed Lerner & Lange had won the debate. What was the central issue for Hayek.

    When you think of the economics of information and price signals, what would you say is the relationship between these?

    What’s your take on Arrow’s “invisible hand” account of his GET construct?

    Say something of the sort that Hayek says about the way most economists typically talk about perfect competition and market failure.

    Explain the important places where Hayek’s understanding of price signals plays a part in Hayek’s differences of views on many and cycles with Milton Friedman and John Maynard Keynes.

    In what way would that relationship between price signals, capital theory, the banking system, and the knowledge problem provide all the room Hayek needs to deny the strong version of the EMH?

    GO

  132. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 21:28

    A nice response to Scott from a Ph.D candidate in economics whose done empirical research on Hayekian/Cantillon effects:

    http://puntodevistaeconomico.wordpress.com/2012/12/03/does-it-make-any-difference-how-money-is-injected-into-the-market-sumner-and-the-cantillon-effect/

    “At The Money Illusion a long and interesting discussion is still taking place around a post by Scott Sumner on monetary effects after a monetary injection of money into the market. Sumner takes on a quote by Sheldon Richman where he says that the Austrian school has (1) distinctively paid attention to the fact that money enters into the market through specific parts and not “as it falls from an helicopter” and (2) that money is non-neutral. Sumner argues that the non-neutrality of money is one of the most studied topics in monetary economics and that it is unimportant how money gets into the market. In the comment section (which I also recommend to read) David Henderson asks “Scott, Just so I can make sure what you’re saying: are you denying Cantillon effects?” Scott’s answer: “Yes.”. I think there’s some true un Sumner comment, but also some shortcomings that overlook the presence of Cantillon Effects.

    Sumner offers the following 4 examples of how money can be injected in the economy:

    Newly injected base money is used to buy T-bonds from banks.
    Newly injected base money is used to buy T-bonds from non-bank securities dealers.
    Newly injected base money is used to buy T-bonds from individuals at a special auction excluding bond dealers.
    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.

    Since in all cases money has a direct and fast effect on T-bonds, it is indifferent how money is injected in to the economy. If directly to banks, to individuals or through the government. In all cases T-bonds and interest rates are affected first.

    There are three things I want to mention.

    First, it may be true that these 4 points are an accurate description of how changes in money supply happen in contemporary United States. It also true that an increment in money supply is done by buying financial assets at market prices rather than being a free gift of purchasing power. But none of these facts go against the presence of the Cantillon Effects.

    Some ones, and not others, see their cash balances increased when the Fed decides to expand money supply. Those some ones are the ones spending the new cash first. Even if we accept this (as Sumner seems to do in the comments sections), there still are Cantillon Effects that can produce long-term non-neutral effects (short discussion here). What would be required for the Cantillon Effects to be absent?

    Homogeneous and correct expected inflation is one of the requirements. If all agents now that inflation will be 3%, then they know now much prices will rise. This is a necessary but not a sufficient condition. If I’m an entrepreneur it doesn’t help my business to increase the prices 3% today if my clients still don’t have the extra 3% of money that’s in the economy. To avoid Cantillon Effects the money helicopter is needed in addition to the correct homogeneous inflation expectations. In other words, to argue against Cantillon Effects we need to assume the helicopter. We can indeed imagine a world scenario with such characteristics, but is not one that loyally expresses the problem of monetary policy and changes in money supply.

    Second, what would a charitable interpretation (and what I think Sumner is trying to say) of Sumner’s post be? It is not that there are no effects but, that given the institutional and market framework, anyway money is injected into the economy produces the same effects. It is different, however, to say that there are no Cantillon Effects than to say that all money supply produces the same Cantillon Effects. Nonetheless, even if all 4 cases come to produce the same affect on the price of T Bonds, it still has a bearing in the market how the second step of money expansion takes place. It is not the same to call on Richman because one considers he made an analytic mistake than to call on Richman due to a different assessment on the empirical extent of the Cantillon Effects. All 4 cases can present the same first-step Cantillon Effect, but the second and following changes do differ from case to case.

    Finally, an academic critique of Austrian theory should be based on academic work, not on media or blog posts. Not that this is what Sumner is trying to do on his post (maybe, maybe not). But it did bring back to my mind the too common rejection of all Austrian economics based on bad economic blogging and conveniently overlooking the academic output and contributions of the last hundred years.”

  133. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 21:48

    What stands out is that when economist like Krugman & Sumner *try* to refute Hayek — THEY DON’T — they only expose their deep incomprehension of something they don’t understand, attested to by the authorities who actually know the stuff who care to point out the pathetic facts. (eg see Garrison on Krugman’s ‘refutation’ of Hayek).

    Scott writes,

    “Out there in the real world most economists view the ideas Greg espouses as being too silly to even spend time refuting.”

  134. Gravatar of Justin Justin
    3. December 2012 at 21:50

    >> Taco prices would rise, but of course that has no bearing on the
    >> post, which was looking at the question of who gets the money first,
    >> not what assets are purchased. Obviously if the Fed pays me a billion
    >> dollars from my house, I’m better off.

    In this hypothetical isn’t it the Taco stands that get the money first? It seems that would be the spirit of what the Austrians are arguing, and so, in this case, you’d be in agreement. Only for Tacos, though.

  135. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 21:53

    Bill Woolsey:

    “Another doctrine Austrians reject is the notion that individuals can pay higher prices for goods before they receive the new money created prior.”

    Which Austrians make this claim?

    Mises? Hayek?

    I doubt they would make such an obvious error.

    It isn’t an error, Bill. It is why increases in the quantity of money are necessary in order for prices to rise over time. Without monetary inflation, price inflation is physically impossible.

    Now, I know what you’re thinking. You are thinking that Fed announcements today can lead to price increases today. Yes, Fed announcements of promises to inflate in can the future be followed by price increases today. But that doesn’t contradict what I argued. For in these instances, it must be understood that the price inflation today depends on, and requires, prior increases in the quantity of money. So it’s still a matter of inflation having to take place before prices can rise. (Note that I am assuming non-negative supply growth).

    If it were the case that prices can rise without monetary inflation, then the Fed would only have to keep making announcements, and never following through with them. I hope you realize that is silly.

    You are assuming that firms produce output and then auction it off.

    Firms can and do raise their ask prices. The can sell less now expecting to make up for it by selling more later.

    Except their buyers can’t PAY the higher prices unless they have more money to spend. Firms cannot raise their prices beyond what people are able and willing to pay.

    People can spend more of their “old” money now, (trying to avoid the decrease in its purchasing power) expecting to get the money back later when their selling prices rise.

    They can’t spend more of their old money unless they received more money prior to that money even being called old money.

    Anyway, suppose new money is spent on good A and the price rises. Some of those who would have purchased good A with “old” money are deterred by the higher price and instead use their “old” money to purchase good B. The price of good B rises.

    Right, so you just explained price inflation as caused by a prior increase in the quantity of money. For if there was no monetary inflation, and there was more spending on good A, thus making the price of good A rise, then this would require less spending on good B, thus making the price of good B fall (abstracting from price elasticity). In this case, there is no price inflation. There is a rise of one price and fall of another price.

    Tracing “new” money through the economy is wrong headed.

    Vehemently disagree. It is crucial because it is a vital component for studying relative price economics. Marginal utility, price elasticity, and other principles, are some of the other vital components. Without a sound knowledge of the relative price effects inflation generates, one is at a loss to adequately explain real world economic phenomena.

    ———————

    ssumner:

    RPLong, Did you even read Greg’s first comment? If so, you must pretty dense if you think it he was being reasonable. It really doesn’t matter whether you think I win the debate because out there in the real world most economists view the ideas Greg espouses (and which you say you support) as being too silly to even spend time refuting. He should consider himself lucky that I still reply, despite his juvenile and insulting writing style, I doubt any other serious blogger even pays any attention to him. Unfortunately whenever I do a post that even touches on some sort of Austrian (or MMT) idea, the lunatics come out of the woodwork and fill up my comment section.

    See that Greg? Sumner can’t refute your arguments, so he engages in ad populum, says he is doing you a favor by responding, and calls his critics lunatics. This is how he concedes defeat.

    Sumner, if you want to avoid being refuted all the time by Austrians, then all you have to do is stop making incorrect assertions concerning Austrian theory. It’s really that simple. You can bring up Austrian ideas, but at least get them correct. You always blast those who get NGDP theory wrong. Are you seriously not able to see that the same thing is happening to your posts that get Austrian theory wrong?

    The idea that it matters who gets the money first is the economic equivilent of creationism or global market denial. People here seem to take it seriously, but I can’t imagine why.

    It is astonishing (well, at this point, it’s really not) how you keep contradicting yourself. You already admitted that tacos would increase in price if the Fed started buying tacos. That would obviously benefit the sellers of tacos! Now you’re saying it doesn’t matter who gets the money first? Hello!

    See, the reason you’re having so much trouble is that you don’t seem to understand that economics is based on individual action. You see dollars and interest rates and spending and financial securities, but you are not seeing how these all connect to individual behavior. So you don’t seem to appreciate that should the Fed start sending checks to individuals who lend, that will affect interest rates, and that sending checks to individuals who sell tacos will affect the price of tacos, and that sending checks to individuals who sell t-bonds will affect the prices of t-bonds, and so on and so forth. Money is connected to prices because individuals value money and goods subjectively.

    Your habit of thinking of economics in a mechanical manner, is preventing you from correctly explaining that which you choose to criticize.

    If getting money is such a great deal, have you ever thought of going to an ATM machine? And be sure to get in line first, before the other guy gets the money. This is really getting silly. No one denies that printing money debases the existing currency, but the gain goes to the government, it’s called seignorage. The gain doesn’t go to the person getting the money, otherwise anyone going to an ATM machine would get the same “gain.”

    This is ridiculous. You are just covering up your inability or refusal to address the point being made so you are treating it like it is not even worth understanding and too silly to entertain. Wow, is all I can say about that.

    The person who goes to the ATM machine is just withdrawing money they already have a claim to. The money already exists as a demand deposit liability. Suvy was referring to NEW money, not existing money.

    As for “who benefits”, it is not a question of one party benefiting from inflation, and no other party benefiting. There is a gradation. A scale. A declining series of gains as the new money is spent and respent from person to person, increasing people’s incomes sequentially. The first receiver benefits the most. The Fed creates money into existence by spending it. So the Fed is the first “receiver” in the strict sense, because it is equivalent to having money and then sending it. The party the Fed sends the checks to also benefit, but they benefit somewhat less. When that party spends the money, the receivers of that money benefit, but benefit by somewhat less than the first two parties, because for them, prices for some things have gone up already. And so on and so forth, until the very individuals last in line receive the new money, who don’t benefit at all, because for them, they experienced the entire path of inflation as rising prices. Once their income rises, there would already have been a new round of initial inflation working its way throughout the economy, where the last receivers are either again pummeled, or, if the are lucky or foresighted, they can be other than last in line. maybe they will be coaxed into buying homes they can’t afford in order to compete.

    Greg Ransom, I really can’t figure out if it’s all an act on your part, a big joke, or if you are just completely delusional. Sincerity? Charitable reading? I don’t think I’ve ever come across a less charitable commenter in my life, except for MF of course.

    Explain why anyone should be charitable to someone who wants individuals to be harmed through the inflation tax. Are you joking? You are near the bottom of the barrel for those who deserve charity. You owe charity to all those who are screwed in your cockamamy inflation scheme that is grounded on nothing but naked aggression against innocent people.

    I’m just going to assume you are joking and leave it at that. The alternative is too depressing.

    Too bad you’re not joking.

    OK, I’ll play along with the joke. Yes indeed, Hayek was the only economist who understood the signal function of prices, the rest of us were completely in the dark until you enlightened us with that pearl of wisdom.

    You have heard of it? How can that be? It’s not a part of aggregate spending or aggregate prices.

  136. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 22:16

    Bill Woolsey:

    Sorry Bill. I realize I didn’t adequately respond to one of the points you made. You wrote:

    Firms can and do raise their ask prices. The can sell less now expecting to make up for it by selling more later.

    I originally responded by saying:

    “Except their buyers can’t PAY the higher prices unless they have more money to spend. Firms cannot raise their prices beyond what people are able and willing to pay.”

    I had assumed, perhaps wrongly, that the subsequent increase in sales was in a context of the same higher prices, when you probably had falling prices in mind.

    Be that as it may, if you imagine a scenario of initially increasing prices, and lower quantity sold, then a reversal, of falling prices and higher quantity sold, then in both cases, the firm cannot sell at THOSE TWO sets of prices unless their buyers actually have the requisite money to spend. To reconcile this scenario with what I argued, it must be understood that the firm can’t raise its prices beyond THOSE two price sets, because their buyers don’t have the requisite money yet, since their nominal incomes haven’t yet been increased by inflation.

  137. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 22:22

    Greg:

    PhD candidate Scott writes:

    If I’m an entrepreneur it doesn’t help my business to increase the prices 3% today if my clients still don’t have the extra 3% of money that’s in the economy. To avoid Cantillon Effects the money helicopter is needed in addition to the correct homogeneous inflation expectations. In other words, to argue against Cantillon Effects we need to assume the helicopter. We can indeed imagine a world scenario with such characteristics, but is not one that loyally expresses the problem of monetary policy and changes in money supply

    That is exactly the point I have been making. So many “lunatics” seem to be getting this easy to understand point.

  138. Gravatar of Greg Ransom Greg Ransom
    3. December 2012 at 22:36

    Scott,

    Most economists thought Hayek’s objections to planning were too silly to even spend time refuting. How’d that work out?

    Most economists thought Hayek’s objections to Keynesian fine tuning were too silly refute. How’d that work out?

    Most economists thought Hayek’s claim that Keynesian manufactured demand wasn’t a demand for labor was too silly to refute. How’d that work out in the 1970s?

    Most economists thought Hayek’s objections to ‘rationality’ as basis of econ science was too silly to refute. How’d that work out?

    Most conomists thought Hayek’s objections to the explanatory adequacy of GET were too silly to refute. How’s that work out?

    Well, how did it work out?

  139. Gravatar of Morgan Warstler Morgan Warstler
    4. December 2012 at 03:37

    If the Govt. suddenly has a higher cost of borrowing, that triggers / rejiggers all kinds of winners and losers.

    Right?

    right.

  140. Gravatar of Major_Freedom Major_Freedom
    4. December 2012 at 05:09

    http://www.bloomberg.com/news/2012-12-03/treasury-scarcity-to-grow-as-fed-buys-90-of-new-bonds.html

    “the Fed, in its efforts to boost growth [MF: i.e. to finance the Treasury], will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.”

    When money dies…

  141. Gravatar of TheMoneyIllusion » It really, really, really doesn’t matter who gets the money first—part 2 TheMoneyIllusion » It really, really, really doesn’t matter who gets the money first—part 2
    4. December 2012 at 05:14

    [...] This post triggered a horror-show of ignorance and insults in the comment section.  So against my better judgment I’m going to push back one more time at a set of arguments that don’t stand up to close scrutiny.  Here’s a typical comment (by Suvy): This is complete garbage. For every dollar that’s printed, it takes away from my purchasing power. By printing money and stashing them in bank reserves, the banks gain spending power at my expense. Inflation is a tax; printing money is a tax. The first people to get the new money benefit the most. If the banks get the money first; they benefit the most at my expense. It makes a huge difference on how the new money is introduced. [...]

  142. Gravatar of dtoh dtoh
    4. December 2012 at 05:33

    Scott,
    You said,

    “Have you checked the inflation rate of 1933-34? Inflation doesn’t come from shortages, it comes from printing too much money. You can have hyperinflation during periods of mass unemployment.”

    No I haven’t looked at 1933-1934 other than a general recollection that money supply, demand, and inflation all jumped after Roosevelt took office, but I don’t think that refutes my statement that inflation is caused by demand exceeding supply over the short term . I probably should have said expected demand exceeding expected supply, but the point is that the absolute level of unemployment is not particularly important. What is important is the change in demand. So even if you have high unemployment, a rise in demand over the short run can cause an increase in inflation. Also in the 1933-34 period, expectations probably amplified the effect, because you went very quickly from an expectation of collapsing demand to an expectation of rising demand.

    As for hyperinflation, that’s an entirely different kettle of fish because there you do have a very pronounced HPE.

  143. Gravatar of StatsGuy StatsGuy
    4. December 2012 at 05:40

    @Greg, Morgan, Major, Others…

    Please let’s show some decorum and respect here. Scott went out on a limb to engage a topic he knew would draw criticism from many readers, and expressed a very cogent argument. IMO, he framed it a bit more strongly than the context justifies, but he did everyone a favor here, and he continues to do us a favor by providing a forum to discuss stuff that others do not – and here’s the 15th most influential foreign policy figure in the world, answering our (my own especially) dumb questions and challenges.

    Can we maybe say thank you? And not call him names?

    Furthermore, let’s admit that in the context he presents, his argument is correct. It makes less difference compared to the bigger overall impact on AD/NGDP, and we shouldn’t confuse these.

  144. Gravatar of StatsGuy StatsGuy
    4. December 2012 at 06:02

    Now back to areas of disagreement (or agreement)

    :)

    1) OMO vs. buying new issues is a trivial difference (commissions on trades for brokers, in the tens of millions maybe – chump change, although still probably a bit crooked). Buying week old issues (which the Fed has done) to avoid openly buying new issues is a PR effort only.

    2) Treasuries vs. MBS – slightly bigger issue. Even though many MBS are owned by GSEs, and perceived to be govt. backed, there was still an interest rate gap, which has closed somewhat. Those anticipating that gap would close loaded up on MBS (Bill Gross, that’s you). With 600 billion in assets, and a NPV discounted value of something, he made good money (enough to put him near the top of his fund category this year). A lot? Well, if you consider all the holders of MBS, and the NPV value increase (which if we believe in markets is what we care about, NOT the hold-to-maturity value), then we’re talking on the order of tens of billions of dollars.

    That is significant. NOT as significant as the overall impact on the economy.

    As to the impact on Treasuries, it depends on the relative fungibility/substitutability. This is like an income vs. substitution effect. On the one hand, the overall price of ALL bonds increases in the short term (more demand), but some of this is offset by a demand shift from Treas to MBS.

    THIS IS NOT CONTINGENT ON ANY ARGUMENT ABOUT FLOW (such as Saturos critiques) – it’s perfectly consistent with rational expectations, assuming Treas and MBS are not perfect substitutes.

    I would argue the Fed agrees with me they are not perfect substitutes, since part of the justification for shifting buys into the MBS market (instead of pure Treas) was to support the housing market. You could argue the Fed is wrong in this assumption (yah, they’ve been wrong on other things…), but they do believe that. Bernanke has spoken to that effect.

    3) Short vs. Long Term

    The gap here is bigger. Buying long term has multiple different effects – and the term structure is important because it represents absorption of long term inflation risks. The Fed can, and has, bought huge amounts of short term securities, but this has a lesser effect on long term rates (which the Fed perceives as more effective near the lower bound at increasing NGDP). The Fed clearly perceives this, because it engaged in Operation Twist, which was designed (and many feel did) remove term rate risk from existing longer bonds (e.g. a gift to holders of long term bonds, a punishment to new buyers and future holders of long bonds). There is a reasonable argument that Cash and Short Term Treas are very fungible, but not Short and Long Treas. So here, I’d argue the point of injection matters more, because AT THE MARGIN long bonds will command a higher price, encouraging more people to sell them and shift to other assets (high bond price = low return).

    4) Fed buying bonds or paying salaries… Clearly, this does not matter much.

    I would note, though, Scott is overlooking another primary beneficiary of Fed activity (yes, seignorage is the largest real transfer, as Bill W observes). That beneficiary is generational, in so far as it REDUCES the amount that will need to be paid by future taxpayers by instead creating an immediate currency-denominated-asset tax. However, Scott said “holding fiscal constant”, so this impact would be nearly the same regardless of whether the Fed bought short bonds or paid salaries. The point here is that monetary policy has impacts that I would consider “fiscal”, in so far as it determines who gets taxed more.

    5) Buying corporate bonds, Stocks, etc. in large quantitities – scott agrees these have substantially significant impact, so there’s no argument here.

    I think this is a mostly fair summary?

  145. Gravatar of dtoh dtoh
    4. December 2012 at 06:43

    StatsGuy,

    Excellent summary. I’m glad someone realizes that information is no longer transmitted by carrier pigeon and that the impact of Fed OMO (and communication pertaining thereto) are instantaneously transmitted to and reflected in all financial asset prices.

    While the choice of asset has some impact on the demand for that asset relative to the demand for other financial assets, I think the change in relative prices is pretty negligible especially if you measure price in terms of real risk adjusted annualized returns. Obviously though as you point out if the Fed picks less liquid assets, the relative price change becomes more significant.

    Other than that, a very good analysis.

    And, the utter ignorance of the workings of financial markets by some commenters on this thread is astonishing.

  146. Gravatar of Good point by Sumner « Blog of Rivals Good point by Sumner « Blog of Rivals
    4. December 2012 at 08:00

    [...] He writes: 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. Share this:EmailTwitterFacebookGoogle +1PinterestLike this:LikeBe the first to like this. ▶ No Responses /* 0) { jQuery('#comments').show('', change_location()); jQuery('#showcomments a .closed').css('display', 'none'); jQuery('#showcomments a .open').css('display', 'inline'); return true; } else { jQuery('#comments').hide(''); jQuery('#showcomments a .closed').css('display', 'inline'); jQuery('#showcomments a .open').css('display', 'none'); return false; } } jQuery('#showcomments a').click(function(){ if(jQuery('#comments').css('display') == 'none') { self.location.href = '#comments'; check_location(); } else { check_location('hide'); } }); function change_location() { self.location.href = '#comments'; } }); /* ]]> */ [...]

  147. Gravatar of DOB DOB
    4. December 2012 at 10:02

    By the way:

    I’m no expert in the Austrian stuff, but this guy claims that Hayek’s ideal policy with have been NGDP targeting:

    http://www.youtube.com/watch?v=iRBdAmerMT0#t=2m12s

    (Not sure if by stability he means constant growth rate or 0% growth rate)

  148. Gravatar of Greg Ransom Greg Ransom
    4. December 2012 at 10:46

    I’ve pointed out to Scott, using NGRAM to establish the self-evident fact, that the language of ‘neutral money’ was essentially introduced into the English language literature by Friedrich Hayek:

    http://books.google.com/ngrams/graph?content=neutral+money%2Cneutrality+of+money&year_start=1800&year_end=2000&corpus=15&smoothing=1&share=

    Hayek’s conception on non-neutrality is not a “private language”, its part of the core of the heritage of economic science.

    It’s to Scott Sumner’s shame — and to the shame of Grad School economics more generally — that it’s all completely unknown to him.

    Now, Scott’s original insult laced request was to provide an alternative definition of the non-neutral significance of money and credit.

    I did that. I did it several times. I did it again and again.

    Scott ignored it.

    And then went on to repeatedly call me names and insult me.

    Here’s Scott’s original demand:

    “If you and your fellow Austrians want to go through life with your own private language that no one else understands, you’ll have about as much success as language purists who insist on calling happy people “gay.” Good luck.

    I notice you don’t provide an alternative definition of money non-neutrality that would make his statement correct, and I’m quite sure that’s because you are unable to do so. It’s all bluster on your part. Now I’m calling your bluff and the readers are about to see how empty your claims actually are.”

  149. Gravatar of Scot Sumner and Cantillon Effects–Part 2 « Punto de Vista Economico Scot Sumner and Cantillon Effects–Part 2 « Punto de Vista Economico
    4. December 2012 at 11:18

    [...] intense (heated?) debate around the Cantillon Effects after an injection of money has produced a new post by Scott Sumner. [...]

  150. Gravatar of Resolution of the Sumner/Richman Showdown Resolution of the Sumner/Richman Showdown
    4. December 2012 at 18:24

    [...] may recall that I was earlier puzzled at Scott Sumner’s commentary on a Sheldon Richman article talking about Cantillon effects. If you care, I now have the resolution, because of Scott’s [...]

  151. Gravatar of Resolution of the Sumner/Richman Showdown – Unofficial Network Resolution of the Sumner/Richman Showdown - Unofficial Network
    4. December 2012 at 23:13

    [...] may recall that I was earlier puzzled at Scott Sumner’s commentary on a Sheldon Richman article talking about Cantillon effects. If you care, I now have the resolution, because of Scott’s [...]

  152. Gravatar of Sheldon Richman Sheldon Richman
    5. December 2012 at 05:30

    I appreciate the controversy my article incited. I always learn from these things. Thank you. And Richman is my real name.

  153. Gravatar of ssumner ssumner
    5. December 2012 at 07:20

    Greg. One last time. Non-neutrality is when monetary policy changes relative prices and the allocation of resources. That’s what I believe, that’s what the official definition is, and that’s what Hayek believed.

    Thanks Sheldon.

    DOB, That’s true, although MF will deny it.

  154. Gravatar of Advocates of Reason: 5 December 2012 | Economic Thought Advocates of Reason: 5 December 2012 | Economic Thought
    5. December 2012 at 08:55

    [...] discusses Austrian capital theory in the context of post Keynesianism and Scott Sumner’s recent post on so-called Cantillon effects. Regarding post Keynesianism, I don’t think there’s much [...]

  155. Gravatar of Major_Freedom Major_Freedom
    5. December 2012 at 10:06

    Statsguy, you wrote:

    @Greg, Morgan, Major, Others…

    Please let’s show some decorum and respect here.

    Can we maybe say thank you? And not call him names?

    Statsguy, can you please approach this in a fair manner, rather than a biased manner? I am not calling Sumner names. In fact, he is calling me names. You don’t see me using such vitriolic language. So if you want to talk about refraining from name calling, maybe you can talk to ALL of those who are actually name calling?

    Furthermore, let’s admit that in the context he presents, his argument is correct. It makes less difference compared to the bigger overall impact on AD/NGDP, and we shouldn’t confuse these.

    I cannot “admit” falsehoods. What is he arguing is incorrect, not correct.

  156. Gravatar of Major_Freedom Major_Freedom
    5. December 2012 at 10:25

    ssumner:

    DOB wrote:

    By the way:

    I’m no expert in the Austrian stuff, but this guy claims that Hayek’s ideal policy with have been NGDP targeting:

    http://www.youtube.com/watch?v=iRBdAmerMT0#t=2m12s

    (Not sure if by stability he means constant growth rate or 0% growth rate)

    Hayek was quite a muddled thinker, so a good rule of thumb when reading him is not to take a particular quote, and assume that is “Hayek’s belief”, but rather, to collect all his quotes on the subject, and compare and contrast them. When you do that, then it is clear that neither the hard money nor the NGDP crowds can pimp Hayek out for their own agendas.

    For Hayek also wrote the following passages (which Sumner characteristically ignores):

    “I hope at least to have shown three things : that there is no rational basis for the separate regulation of the quantity of money in a national area which remains a part of a wider economic system; that the belief that by maintaining an independent national currency we can insulate a country against financial shocks originating abroad is largely illusory; and that a system of fluctuating exchanges would on the contrary introduce new and very serious disturbances of international
    stability.” – Monetary Nationalism and International Stability, pg 73.

    “In a securely established world State with a government immune against the temptations of inflation it might be absurd to spend enormous effort in extracting gold out of the earth if cheap tokens would render the same service as gold with equal or greater efficiency. Yet in a world consisting of sovereign national States there seem to me to exist compelling political reasons why gold (or the precious metals) alone and no kind of artificial international currency, issued by some international authority, could be used successfully as the international money.” – ibid, pg 75.

    There are many, MANY more quotes like this that, if stripped away from the counter-example quotes, the way Sumner is whoring out Hayek for his own agenda, then it would not be incorrect to argue that “Hayek’s beliefs” are one that contains a rejection of NGDP targeting.

  157. Gravatar of Major_Freedom Major_Freedom
    5. December 2012 at 10:37

    ssumner:

    Greg. One last time. Non-neutrality is when monetary policy changes relative prices and the allocation of resources. That’s what I believe, that’s what the official definition is, and that’s what Hayek believed.

    Ergo, since what you call “monetary policy” does change relative prices between bonds vis a vis everything else (the same way what you call “fiscal policy” changes relative prices of cars vis a vis everything else, or gold vis a vis everything else), it follows that you contradict yourself when you deny the Cantillon Effect operates in the scheme of the Fed buying bonds.

    If you deny this on the basis that buying bonds is a “swap” of equal values (which is itself incorrect since no trades are made on the basis of trading equal values, but rather, offsetting and unequal valuations from both parties), then if the Fed bought cars or gold, then that too would be merely a “swap” of equal values, and no benefits would accrue to car or gold sellers. If the Fed buying cars or gold makes car or gold sellers wealthier, then it does the same thing for bond sellers. There is nothing magical about bonds that suddenly turns what is true for million, potentially billions of things with prices, for some incredible reason, does not apply to bonds. 99,999,999,999 goods it applies, but for 1 thing, bonds, it does not apply.

    Is there a law of the universe that is responsible for this rather amazing outcome? That bond sellers are miraculously able to get around the Cantillon Effect that 99 trillion potential other goods sellers cannot? Are you serious?

    Face it Sumner, you lost. The honest thing to do is admit it and move on. You’ve already made some ridiculously wrong defenses to salvage the debacle you unleashed. Just admit that the Cantillon Effect exists in pure market monetarism, and we can all go home. The more you deny it, the more you present yourself as purposefully trying to hide or evade something, then I implore you, the more you will present an image of having nefarious intentions.

  158. Gravatar of Clarification on Cantillon Effects Clarification on Cantillon Effects
    6. December 2012 at 21:15

    [...] no, Scott didn’t say that. Instead he wrote a post with the palpably false title, “It makes very little difference how new money is injected.” On a plain English [...]

  159. Gravatar of Those Dreaded Cantillon Effects « Uneasy Money Those Dreaded Cantillon Effects « Uneasy Money
    6. December 2012 at 22:40

    [...] again, I find myself slightly behind the curve, with Scott Sumner (and again, and again, and again, and again), Nick Rowe and Bill Woolsey out there trying to face [...]

  160. Gravatar of Clarification on Cantillon Effects – Unofficial Network Clarification on Cantillon Effects - Unofficial Network
    7. December 2012 at 03:43

    [...] no, Scott didn’t say that. Instead he wrote a post with the palpably false title, “It makes very little difference how new money is injected.” On a plain English [...]

  161. Gravatar of TheMoneyIllusion » If I buy T-bonds, their price rises. If the Fed buys T-bonds, their price (usually) falls TheMoneyIllusion » If I buy T-bonds, their price rises. If the Fed buys T-bonds, their price (usually) falls
    7. December 2012 at 07:04

    [...] no, Scott didn’t say that. Instead he wrote a post with the palpably false title, “It makes very little difference how new money is injected.” On a plain English reading of [...]

  162. Gravatar of Does it make any difference how money is injected into the market? Sumner and the Cantillon Effect « ESEADE Does it make any difference how money is injected into the market? Sumner and the Cantillon Effect « ESEADE
    7. December 2012 at 14:09

    [...] The Money Illusion a long and interesting discussion is still taking place around a post by Scott Sumner on monetary effects after a monetary injection of money into the market. Sumner [...]

  163. Gravatar of Scott Sumner and Cantillon Effects–Part 2 « ESEADE Scott Sumner and Cantillon Effects–Part 2 « ESEADE
    7. December 2012 at 14:29

    [...] intense (heated?) debate around the Cantillon Effects after an injection of money has produced a new post by Scott Sumner. [...]

  164. Gravatar of Free Banking » Sumner v. Cantillon Free Banking » Sumner v. Cantillon
    9. December 2012 at 14:27

    [...] The specific claim to which Scott objects is Sheldon Richmond's assertion that Fed open-market operations benefit those directly involved in them more than others because “early recipients—banks, securities dealers, government contractors—have the benefit of increased purchasing power before prices rise.” On its face that assertion appears, to me at least, as incontestable as the claim that, if I choose to do my Christmas shopping at Macy's rather than at Bloomingdale's, Macy's gains more from my display of Christmas spirit than Bloomingdale's does. [...]

  165. Gravatar of ProdigalMBA ProdigalMBA
    11. December 2012 at 02:07

    I wanted to thank everyone represented here for the lively monetary economics discussion (it kept me up until 4am reading it on Dec.5th-6th). It inspired me to finish my post on using venture capital instead of loans as a means of introducing new money into the economy. (You can correctly infer I’m from Silicon Valley where we tend to do things a little … differently). Welcome to see it in the article titled “The Venture Bank on Main Street” located at http://prodigalmba.rstoem.com/2012/12/10/theventure-bank-on-main-street/

  166. Gravatar of Cantillon-effekter och Fed | Statans Dagblad Cantillon-effekter och Fed | Statans Dagblad
    11. January 2013 at 13:36

    [...] är Scotts första svar och hans andra inlägg Han skrev sedan två inlägg till på sin blogg om saken. Murphy kommentarar [...]

  167. Gravatar of The Fed Orchestrates the Largest Redistribution of Wealth from Poor to Rich, The Left Blames The Free Market | Escape Velocity The Fed Orchestrates the Largest Redistribution of Wealth from Poor to Rich, The Left Blames The Free Market | Escape Velocity
    20. September 2013 at 17:54

    [...] of billions of dollars. Scott Sumner and Tyler Cowen come to mind. Earlier this year Sumner wrote a series of blog post on this topic after Sheldon Richman wrote about Cantillon effects in an article [...]

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