JP Koning jumps into the fray on the Cantillon Effects debate. It occurred to Koning that if we’re going to argue over the issue, maybe we should actually see what Cantillon wrote? Very nice, JP.
Let me focus on this aspect of Koning’s attempt to reach a peace treaty:
While we don’t have to agree with Cantillon’s ordering of effects, it seems uncontroversial to assume that if expectations only adapt slowly, then there will be some sort of distributional effect during the adjustment period to an unanticipated change in the money supply. There can certainly be debate over the size and consistency of this effect. Austrians, for instance, build a business cycle theory out of it. Others consider the effect to be ephemeral.
On the other hand, if rational expectations are assumed from the start, then the location of gold’s injection point is moot since everyone perfectly anticipates the repercussions and adjusts. In talking about injection points under rational expectations, it seems to me that market monetarists are having a totally different conversation than Austrians, who are interested in injection points under imperfect expectations. Is this just a debate over the nature of expectations? [Bold added.]
I have a deal for JP Koning, Scott Sumner, and Nick Rowe (since I think they would agree with him):
You guys convince the government to give me a printing press. I’ll store it in my basement with a lot of security to make sure nobody else uses it. I promise I will give all of you a full month to get ready whenever I’m going to create new money. For example: In January, I’m going to print up $1 billion, and I will spend $500 million on gold bullion and the other $500 million on buying into the S&P500.
Do whatever you guys need to, to get ready. Blog about my plans, set up a Facebook page, whatever. Get Glenn Beck to warn his listeners to call Goldline in December.
Now: Does anybody deny that it matters to me that I’m going to have that $1 billion in January? Are you guys saying you wouldn’t want the printing press, so that you could buy the assets instead? Do you really mean to say these “injection effects” are completely irrelevant, so long as the price of gold and shares of stock can adjust before I enter the market?
The true irony in all of this discussion is that everybody concedes as a matter of course that the government benefits from having the printing press, i.e. from being the first person in line to get the newly created money. But gee Sheldon Richman and you other Austrians, that doesn’t count as an injection effect mattering! That’s what we call “seignoriage.” So I guess the term for what the monetary authority earns, by creating new money, is actually “fiscal policy”?
Last thing: I do not deny that Scott et al. have made some good points. In particular, it’s true that other asset holders benefit when the Fed (say) buys up MBS; it’s not just the particular person selling to the Fed. Even so, there is nothing wrong in Sheldon’s original essay (he didn’t even use the term “Cantillon effect,” for one thing). This is yet another example of economists making a bunch of simplifying and false assumptions to wag their fingers at a “layman” (in quotes because Sheldon is very well-read) for making a true statement but not explaining it the way they would have.