Last post this year from me on Cantillon, with the usual disclaimer that if Paul Krugman jumps in, all options are back on the table…
In another comment Bill Woolsey says:
In my view, Richmond’s short quotation and your short quotation about Wall Street restaurants were very much wrong and focus on from whom particular assets are purchased. In particular, the notion the somehow that whatever benefit primary security dealers get from trading with the Fed is similar to the benefits of counterfeiting is very much wrong.
Yes! This is a great controversy and it would make for a good analysis (which I don’t have time to do right now, and I think more and more people are tiring of this discussion). Believe it or not, I have always had trouble with the standard exposition of Cantillon effects, precisely for the expectations reasoning that JP Koning made explicit. (This was all in Scott’s first post, I’m just saying Koning fingered it as the central issue under dispute.)
But this isn’t a Rodney King moment, not yet. It’s not simply that Sheldon Richman pointed to a certain mechanism and placed more importance on it, than Scott or Nick Rowe or Bill Woolsey would have done. No, Scott’s repeated clarifications are much stronger than that.
For example, in his latest salvo Scott implicitly says I am wrong on this and a child (but he quotes someone else so the sting didn’t come from Scott’s own lips), and that Steve Horwitz in contrast is the only Austrian adult in the room. OK fair enough, I said Scott’s post title was “palpably false” so I should be ready for some pushback. Yet Scott also said this:
I notice that lots of commenters insist that bondholders gain when the Fed injects money by buying bonds. Even if this were true, it would have no bearing on my criticism of Richman….But there’s a much bigger problem with this fallacy. It’s unlikely that monetary injections would raise bond prices at all.
On a plain English reading (and perhaps that’s not the best lens through which to interpret Sumner posts), Scott is saying the Fed as a general rule can’t affect short-term interest rates. So, there goes Austrian business cycle theory. I don’t think Steve Horwitz was conceding that in his post, which (to repeat) Scott praised as being sensible, as opposed to the nonsense that Sheldon and I were spouting.
UPDATE:: OK, correcting for what I think was a typo on Scott’s part, it seems he is here clarifying that the Fed can make T-bills go up in price by buying them, but it can’t make T-bonds go up in price by buying them. How this proves that “any influence of the injection point is a matter of fiscal policy” is beyond me, but at least it seems Scott agrees that the Fed can cut short-term interest rates.