07 Dec 2012

One More on Cantillon for 2012

Federal Reserve, Inflation, Market Monetarism, Nick Rowe, Scott Sumner 18 Comments

[UPDATE below.]

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.

18 Responses to “One More on Cantillon for 2012”

  1. JP Koning says:

    Bob, I’ll try and catch up with you and everyone else this weekend. But I gotta say, I salute you for your tenacity.

  2. Nick Rowe says:

    What Scott should have said/meant is that whether the price of Tbonds goes up or down when the Fed buys them depends on how this affects expected future monetary policy. Under current circumstances, if the Fed’s buying Tbonds was seen as a decision by the Fed to raise future NGDP, the price of Tbonds would fall.

  3. Tel says:

    Why don’t we just accept that tracking the exact equivalent wealth transfers is difficult to do, and impossible to measure directly?

    Most people have already accepted that it is the same situation with taxation (because entities have various abilities to pass the tax on or bypass some taxes by restructuring their affairs).

  4. guest says:

    It’s unlikely that monetary injections would raise bond prices at all.

    Not that I consider bonds anything more than an IOU for that which the government isn’t permitted to hand out, and even then it’s an IOU for more different IOU’s (fiat money) …

    But wouldn’t the bond prices fall absent the “money” printing?

  5. Rick Hull says:

    Regarding the comparison to counterfeiting:

    True “counterfeiting” would be unannounced creation (and spending) of new money. Announcing the creation and spending plan would have different effects than this. Expectations do matter. So let’s adjust the comparison not to counterfeiters but to someone who has found 10% of the world’s known gold supply in his backyard, in immediately transactable monetary form. His story hits the papers like someone who just hit the biggest powerball mega-jackpot ever, and he freely answers questions about what he will do with the newfound wealth.

    I think it’s hard to deny that the creator/owner of the new money gets what he spends it on “for free”. So it’s the Fed who is the figurative counterfeiter/miner here, not the PSDs. The PSDs benefit from increased demand for their product and higher prices than would otherwise occur. The PSDs are the equivalent of the Ferrari dealership in the counterfeiting story, not the counterfeiter.

    • guest says:

      Right, the people who print the money expect to get something in return for them giving artificial purchasing power to their cronies.

    • guest says:

      Also, it’s still counterfeiting even if it’s announced.

      Further, in a free market I could simply ditch fiat money for gold when I learn that there is counterfeiting going on. But the government threatens us with jail and, ultimately death (if we rightfully resist), if we use the paper money they were never authorized to issue.

  6. Bob Roddis says:


    Yes, It Matters Who Receives Newly Created Money


  7. Bob Roddis says:

    I don’t know if MF has already said this in these comments, but he’s already told this to Sumner:

    The argument isn’t over bond prices. Richman’s argument, which you continue to misrepresent and misunderstand, is that IF the bond sellers get the new money first rather than, say, gold sellers or consumer goods sellers, then the bond sellers are relatively benefited as compared to everyone else, because while everyone owns depreciated money, and while the real value of bonds goes down, the bond sellers receive new money, whereas everyone else does not.

    The fallacy in your thinking is that you keep comparing the wrong two things. You are comparing inflation with no inflation, when you should be comparing inflation sent to bond sellers rather than inflation sent to gold sellers or consumer goods sellers.

    Yes, nobody is denying that bond prices tend to fall with inflation, but if inflation is going to take place, then bonds are screwed regardless. But if the bond sellers get the new money first, then they are relatively benefited as compared to others. Hence, it certainly does matter who gets the new money first.


    And Horwitz is right but how is that different from any other Austrian has said?

    Trying to solve a problem that does not exist with a “solution” that is the problem.

  8. Major_Freedom says:

    Set up: Inflation takes place. Consumer prices rise. Bond inflation premiums rise. Bond prices fall.

    Scenario 1: Inflation goes to consumer goods sellers first.

    Scenario 2: Inflation goes to bond sellers first.

    Question: Is Sumner, Rowe, et al, going to argue that it does not matter to either the bond sellers or consumer goods sellers of who gets the new money first? That both parties are indifferent? That because bond prices fall, the bond sellers would think “Pfft, give the money to the consumer goods sellers, it makes no difference to me! My bonds have already dropped in price!”, and the consumer goods sellers would think “Pfft, give the money to the bond sellers, it makes no difference to me! My cost of living has already went up!”

  9. Major_Freedom says:


    If you accept that my spending money on Mr. Smith and not Mr. Jones, benefits Mr. Smith relatively more than Mr. Jones, and if you accept it will have different effects on the economy, then…

    Imagine I am a money printer.

  10. Adrian Gabriel says:

    Scott is the child in the room attempting to clump capital together. Furthermore, Horwitz’s nice use of IS-LM curves might make it easier for a statist like Sumner to understand, but even Horwitz is getting a little carried away in regards to respecting human action. One thing many mainstream economists need to understand is that an analysis of how markets works descriptively should be enough, while also understanding basic accounting. Basic accounting helps Rothbard’s methods become more accurate. Yet I understand mainstream economists love their vast assumptions and multitude of euphemisms for basic praxeolgocial principles. They love liquidity preference. Come on man…..that’s a Keynesian tool that was destroyed by Rothbard. Mainstream economists need to take some lessons in time preference, then they’d see where all those overblown assumptions are getting carried away. I remember Horwitz telling me once “Well I guess all that studying I did was totally not worth it.” Those statists are funny. I remember Krugman making the same statement when he first started finding out about ABCT.

  11. Bill Woolsey says:

    Sumner doesn’t believe that central banks cannot cause short term interest rates to fall in the short run. During this discussion he has claimed that short run changes in short run interest rates are due to the “liquidity effect.” (He doesn’t put much weight on the lending by the banking system that matches the money creation. He said that is because interest rates change even with gold mining, and would change with helicopter drops, or what have you.)

    He does believe that an upward shift in the target for inflation or nominal GDP can cause even short term interest rates to rise, even if some are being purchased by the central bank.

    This is a big issue for Market Monetarists. We believe that right now, it is likely that a committment by the Fed to shift to a higher growth path for nominal GDP would result in higher interest rates right now–including short ones.

    But this effect would be stronger for longer term interest rates. That is, longer term interest rates are more likely to rise in response to a higher target for nominal GDP or inflation than are shorter term interest rates.

    A policy of more rapid money growth (the traditional monetarist thought experiement which is sometimes in the back of Sumner’s mind, I think) would normally involve purchasing some kind of bonds as well as an implied higher target for inflation. The result on all bond yields is ambigous, but the longer the term to maturity, the more likely that the result would be increases. It is this thought experiement that is behind much of the expectations discussoin.

    Given the target for nominal GDP or inflation, a central bank can target short term interest rates using the liquidity effect. (Or the banking lending channel) The long term interest rates are tied down by the target for nominal GDP or inflation. Basically, the impact on short term interest rates will be expected to be temporary. An excessively large increase in the quantity of money will be expected to be reversed to keep to the long run target.

    I agree with this, though would put more emphasis on the direct lending by the banking system. Given the implied target for inflation, the price level, nominal GDP or whatever, excessive growth in money would tend to lower short term interest rates, but if the regime is expected to hold, long term interest rates depend on the natural interest rate needed to maintain the regime. The excessively low short term interest rates in this situations are an error.

    • Bob Murphy says:

      Bill wrote,

      During this discussion [Sumner] has claimed that short run changes in short run interest rates are due to the “liquidity effect.” (He doesn’t put much weight on the lending by the banking system that matches the money creation. [Sumner] said that is because interest rates change even with gold mining, and would change with helicopter drops, or what have you.)

      Thanks for helping me to understand Bill. The part I put in bold is what made me think that Sumner really was saying more than simply. “Oh of course the Fed can change asset prices, I’m just saying it will change all assets in that class, not just the price of the guy they buy it from.” Because I got the sense–as you are confirming here–that Sumner thinks the Fed buying bonds isn’t what changes short-term interest rates, it’s the Fed creating new money per se. Hence, “it doesn’t matter where the money gets into the economy.”

      Do you at least agree Bill that there are multiple disagreements here, and it’s not just that I have reading comprehension difficulties as some have suggested? (Feel free to say, “No, Bob, you’re just pretty thick.”)

      • Major_Freedom says:

        Because I got the sense–as you are confirming here–that Sumner thinks the Fed buying bonds isn’t what changes short-term interest rates, it’s the Fed creating new money per se. Hence, “it doesn’t matter where the money gets into the economy.”

        Murphy, do you agree that if there is going to be inflation “somewhere”, and it is going to lead to reduced bond prices for sure, that bond sellers would be better off if they received the initial inflation as opposed to others?


        Do you agree that Sumner’s insistence that it is important to point out that is doesn’t matter WHO gets the new money first, but WHAT asset the Fed buys, is an untenable distinction, because whatever asset the Fed buys, it necessarily implies a specific group of “who’s”?


        Sumner claimed that if Austrians believe inflation raises t-bond prices, then they and everyone else can benefit from inflation by buying t-bonds and don’t have to sell t-bonds to the Fed themselves.

        Do you agree that not everyone can gain in this way, because in order for people to gain money from rising t-bond prices, they are going to have to SELL the higher priced t-bonds to others, which of course implies the existence of a group of people who didn’t initial buy the t-bonds before they rose in price? For if everyone just bought t-bonds, and there were nobody to sell it to later on for a higher price, the price would literally collapse to zero!

    • Major_Freedom says:


      Sumner doesn’t believe that central banks cannot cause short term interest rates to fall in the short run.

      The problem is that Sumner believes money is long run neutral.

      One cannot hold money to be short term non-neutral, but long run neutral. Why not? Because the long run is a consequence of a series of short runs. If the sequence of short runs are money non-neutral, then by construction money must be long run non-neutral as well.

      Suppose the short run effect of inflation is an increase in home construction, rather than, say, an increase in office building construction, or, nothing at all. Suppose that the inflation was one time only. It’s easy to see how money cannot be long run neutral. What has to at least occur is for the additional houses to be destroyed, and the office buildings that didn’t get built, to get built. For that is what would have otherwise occurred if the inflation never took place. But what are the chances of people destroying the additional houses after an inflationary episode? Virtually nil, if not nil.

      Now, let’s suppose that a miracle occurred, and, incredibly, people really did behave in accordance with long run money neutrality. Suppose they really did destroy the additional houses and instead built more office buildings. Guess what? That process of “correction” is itself a new series of resource and labor usages that would not have occurred had the inflation not initially taken place. For if the inflation did not take place, then there would have been no resources and labor tied in with destroying additional houses and building additional office buildings! The future is forever altered! Going forward, the future will never be in accordance with the inflation never having occurred. The one time inflation forever altered the future!

      The present time is a consequence of all prior events and actions. NO OTHER SET OF ACTIONS could have generated this unique reality we are now experiencing. If prior events were different, then today’s reality would be different. You might be skeptical, but the life you are living right now is in part a function of not only what happened yesterday, but what happened years ago, as far back as the Trojan War, and further, back to the time of the dinosaurs! If the Trojan War never occurred, then civilization would have been ever so different, and the compounding effects since then would have lead to a reality in December 2012 that would have been different than it is now!

      Not only is money not long run neutral, but everything we humans build and everything we do is not long run neutral. Your actions today will have consequences that will never allow you to change the present into what it otherwise would have been had your past actions been different. Even if you tried to do it, you couldn’t do it, because not only would the very attempt to do it change what you otherwise would have done at that time had you in fact made different choices in the past, but there is no way for you to even know what the world otherwise would have been like if, say, the Trojan War never happened.

  12. Major_Freedom says:

    I wrote this on Sumner’s blog:

    The argument that one does not have to actually receive new money from the Fed in order to relatively benefit from inflation, for example, that one can buy t-bills that will later go up in price, and thus one can acquire gains equal to the gains acquired by those t-bond sellers who actually sell to the Fed, while seemingly a valid argument in itself, doesn’t actually prove what it ostensibly sets put to prove.

    In order to actually gain by such speculation, it is not enough that the t-bond prices merely rise in value. The t-bond owners must go out and sell the t-bonds, to other investors. This of course implies the existence of a population of investors who do not speculate in t-bonds, but rather buy them at higher prices from those investors who do speculate.

    In other words, not everyone can gain from inflation via speculation! For if everyone did try to gain from inflation via speculating on t-bonds, then there would not be anyone to later sell them to. If there is nobody available to subsequently sell the t-bonds to, at higher prices, then the t-bond prices would actually collapse to zero. This is because prices require actual exchanges to be made. Without exchanges, there are no prices.

    Hence, the Sumnerian “solution” for benefitting from inflation the way the primary dealers benefit from inflation, is not actually a universal solution. The “solution” requires a population of people who relatively lose from inflation (i.e. those who initially don’t speculate, but then buy the same t-bonds at higher prices from the primary dealers and the speculators).

    Thus, the Richman argument that it matters who gets the new money first, stands. The only alteration needed is to say “It matters who gets the new money first, because those who receive the new money first, and those who own the same assets as those who receive the new money first, will relatively benefit, and those who this group needs in order to relatively benefit, namely, those who do not currently own the asset but will pay higher prices later on, they will relatively lose.

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