It’s interesting to see the Austrians furiously backpedaling from their criticism of my Richman post. Recall that Richman said:
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.
This is wrong. It makes no difference who gets the extra money from the Fed, because the recipient is no wealthier than before (money is swapped for bonds) and hence they have no incentive to spend any more. Rather the impact occurs in the AGGREGATE. Total holdings of the base now exceed total base demand at the current price level, and hence aggregate nominal spending rises (if the injection is permanent.)
Then the Austrian commenters started to change the subject—asking what would happen if the newly injected money was used to buy goods and services. It still wouldn’t make a whole lot of difference which individual got the money, i.e. whether the Fed bought zinc in the US or Canada. However because profit margins in sales of goods and services are higher than in bonds, it might well make some difference. I agreed with that claim from the beginning. More importantly, it could obviously matter for the zinc market.
Now the commenters suggest it is I who am changing the subject, and have somehow given ground. That’s wrong, I stand 100% behind everything I’ve written in recent posts and comments.
Here’s Bob Murphy:
Scott actually doesn’t dispute anything in what the Austrians have in mind when they say “it matters who gets the Fed money first.” It’s just that Scott calls such outcomes “fiscal policy” and thus, by definition, “monetary policy” can’t help some and hurt others in terms of who gets the money first.
If Richman is an Austrian, I most certainly do dispute what they have in mind. To reiterate:
1. In actual real world monetary policy the central bank buys government debt, Treasury backed MBSs, or something similar. Contrary to Richman, it makes no virtually difference who gets the money first.
2. During normal times when rates are
low above zero, it wouldn’t even make any macroeconomically significant difference if central banks bought gold, common stock funds, etc. The amounts are way too small.
3. At the zero bound, the purchase of stocks or gold might matter a little bit, but the effect would still be dwarfed by other aspects of Fed policy.
4. If the central bank bought goods and services at the zero bound, then the direct impact on those markets might be significant. But that would be combining monetary and fiscal policy. More importantly, central banks don’t do that.
So yes, when the world’s central banks start buying bananas, then it will be safe for Austrians to talk about “Cantillon effects.” Until then they should just quietly drop the subject, pretending that it was never a part of Austrian dogma.
PS. If Austrians want to hitch their “Cantillon effects” argument to fiscal channels, then expect a giant yawn from the profession. We’ll be about as excited as when Greg Ransom tells us that only Hayek understood that prices had a “signalling role.”
PPS. Of course I agree with Nick Rowe’s post—any important Cantillon effects would reflect fiscal policy, and the Fed doesn’t do fiscal policy. When the Fed buys bonds, it makes no difference “who gets the money first.” They do not get first dibs at buying stuff.
PPPS. Maybe this would help. There’s a big difference between claiming “it matters whether the Fed buys bonds X or Y” and “it matters whether the Fed buys bonds X from Joe or Fred.” Richman is claiming it matters whether they buy bond X from Joe or Fred, because the lucky ducky who gets that cash first can buy those goods about to go up in price. That’s wrong.
Update: Here’s the Richman article.