05 Dec 2012

I Have a Deal for JP Koning, Scott Sumner, and Nick Rowe

Inflation, Market Monetarism, Nick Rowe, Scott Sumner 65 Comments

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.

65 Responses to “I Have a Deal for JP Koning, Scott Sumner, and Nick Rowe”

  1. Greg Ransom says:

    Koning is totally on point that is is all about magic — I mean Rational Expectations.

    • Greg Ransom says:

      What if the government allowed people to buy 50 year bonds instead of paying their taxes.

      Is that monetary policy or fiscal policy?

      • Greg Ransom says:

        Say I loan some of my newly purchased bonds to the local Savings & Loan and I use some of my bonds to pay a home builder to build me a house.

        The S & L uses my loan to secure its own lending operations.

        The home builder loans his bond income to the S & L.

        Lather, rinse and repeat.

        Do we have money and credit phenomena taking place or fiscal spending& policy taking place.

  2. Desolation Jones says:

    ” Even so, there is nothing wrong in Sheldon’s original essay ”

    This part is wrong

    “Since Fed-created money reaches particular privileged interests before it filters through the economy, early recipients— banks, securities dealers,…. have the benefit of increased purchasing power before prices rise.

    Yes, the guy with the printing press has some benefits, but what Sumner is arguing is that the primary dealers (“banks, securities dealers”) don’t benefit in the expense of everyone else, which is what Sheldon is claiming. That’s wrong. You can read Sumner’s posts to see how.

    And it’s not a concession when Sumner says the guy with the printing press (the government) has some benefits. Its a correction. Sheldon claimed that mainstream economists overlook that part, which is again wrong.

    • Bob Murphy says:

      Desolation Jones wrote:

      This part is wrong…

      Wait a minute. It’s wrong in the real world, or it’s wrong in Scott and Nick’s model, where everyone has rational expectations and perfectly anticipates all increases in the money stock?

      • Desolation Jones says:

        But perfect rational expectations isn’t needed to see how the the primary dealers aren’t benefiting more than anyone else. See Sumner’s fist post. Had the fed bought bonds directly from the government, the primary dealer’s purchasing power wouldn’t be any different from the scenario where the fed purchased bonds from primary dealers instead.

        • Major_Freedom says:

          But perfect rational expectations isn’t needed to see how the the primary dealers aren’t benefiting more than anyone else. See Sumner’s fist post. Had the fed bought bonds directly from the government, the primary dealer’s purchasing power wouldn’t be any different from the scenario where the fed purchased bonds from primary dealers instead.

          This is incorrect. If the Fed buys from the Treasury, then while everyone, including the Treasury, now own depreciated money, only those at the Treasury acquire an offset to that lower depreciated money, by acquiring more money.

          The primary dealer’s purchasing power would in fact be relatively different, because now they own depreciated money, but they didn’t get an offsetting increase in actual money. The Treasury did. Hence, the Treasury gains at the expense of everyone else not in the Treasury.

    • Matt Tanous says:

      “Yes, the guy with the printing press has some benefits, but what Sumner is arguing is that the primary dealers (“banks, securities dealers”) don’t benefit in the expense of everyone else”

      Well, they do. They have money they would not have otherwise obtained. And they get to spend this before prices rise. Unless we assume that every single price in the economy can adjust perfectly the right amount upwards when Bernanke says “QE will be this many dollars per month buying these particular assets”, which is frankly absurd.

      • Desolation Jones says:

        “They have money they would not have otherwise obtained.”

        The bond market is highly liquid. They could have exchanged their bonds for money even if the Fed wasn’t buying.

        Lets say I as an individual own some bonds. The fed announces it’ll buy couple billion bonds next week. At the very same time the primary dealers start to sell their bonds to the Fed, I also sell off my bonds. What exactly is so special about the primary dealers getting the “new money”? I also sell my bonds (not to the Fed) and get some old money for them. How are the primary dealers benefiting anymore than I am as an individual because of their new money? What difference does it make that they’re getting new money and I’m getting old money? I don’t understand why there’s such a crucial distinction between old money and new money. Also, while more cash is available for me, my wealth doesn’t go up because I also give up my bonds, which I bought with my own hard earned money.

        I guess you could say the primary dealers would make a killing by selling bonds at higher price when the fed lowers the interest rate, but lower interest rates would have happened even if the Fed had brought bonds from someone else. The primary dealers could have sold their bonds at a higher price even if the Fed wasn’t buying directly from them. And lower interest rates is not even clear. QE2 and QE3 caused bond prices to rise.

        Note: I’m also trying to wrap my head around this. Don’t mean to sound as if know this for sure.

        • Major_Freedom says:

          The bond market is highly liquid. They could have exchanged their bonds for money even if the Fed wasn’t buying.

          But they would have received otherwise less money, because without the Fed, there is a removal of a nominal demand component in the bond market. Even if bond prices go up should the Fed stop buying bonds, then it should be understood that the rise is less than it would have been had the Fed printed money to buy bonds.

          Lets say I as an individual own some bonds. The fed announces it’ll buy couple billion bonds next week. At the very same time the primary dealers start to sell their bonds to the Fed, I also sell off my bonds. What exactly is so special about the primary dealers getting the “new money”?

          What is “special” is that they receive new money to offset the depreciated money loss, while you and everyone else owns depreciated money, but did not receive new money. Transfers within the “loser group” doesn’t change the relative gains accruing the “winner” group.

          I also sell my bonds (not to the Fed) and get some old money for them. How are the primary dealers benefiting anymore than I am as an individual because of their new money?

          If you gain money in this way, then others must lose money, since they are spending their money on your bond. You and your buyers lose, because you own depreciated money, but the bond sellers to the Fed do not lose, because while they own depreciated money, they also own more money.

          I guess you could say the primary dealers would make a killing by selling bonds at higher price when the fed lowers the interest rate, but lower interest rates would have happened even if the Fed had brought bonds from someone else.

          If that happened, then the group that benefits would be those initial receivers of money, who can offset the depreciated money with new actual money, whereas everyone else can only transfer depreciated money amongst themselves.

    • Christopher says:

      Desolation Jones,

      So if Ben Bernake calls G-S and asks them to sell him all their mortgage-backed securities, they would say something like: Well, we’d be happy to help you Ben, but we are quite busy right now. Why don’t you ask Morgan Stanley?

    • skylien says:

      Of course they are gaining at the expense of anyone else. Just like any industry does that has a guaranteed income due to government expenditures.

      The important thing though about the inflation tax in contrast to normal taxation is that nobody can tell who paid how much of it. This is because it depends on which route the new money is spend step by step throughout the economy, and affects prices slowly while at the same time this is overlapped by normal price changes due to supply and demand. Only in retrospect it is theoretically possibly to tell who really paid the inflation tax, while this is clear for any direct tax before the money is even spent by government. Yet since this is overlapped by normal price changes this is not even possible in praxis even in retrospect. The only thing you know is that people on fixed incomes pay the lion’s share the way it is done now.
      And just like any government subsidized business is prone to bankruptcy when the subsidy by government stop to flow, the same is true if the government subsidizes long term investment projects by pushing interest rates down therefore subsidizing the loan market in general. At the moment the government stops this subsidy (Its central bank raising interest rates) the game stops.

      I don’t think it is possible to subsidize the loan market (push interest rates down) without increasing the money supply. Pushing interest rates down only works BECAUSE the taxed don’t know when and how much they are taxed. If everybody could perfectly anticipate how the inflation spreads in the economy, nobody would pay the tax, they could perfectly avoid it by shifting into those assets that would see an increase of price first before the inflation tax could reach them.

      • skylien says:

        *in parxis* should be *in practice*

    • Major_Freedom says:

      Desolation Jones:

      Yes, the guy with the printing press has some benefits, but what Sumner is arguing is that the primary dealers (“banks, securities dealers”) don’t benefit in the expense of everyone else, which is what Sheldon is claiming. That’s wrong.

      No, that’s right. If only the primary dealers benefit at first, and that benefit derives from being in a relatively better position than others of whom they economically compete with to buy goods and services, and nobody else benefits, then that is one party benefiting at the expense of the other!

  3. Max says:

    I’m frustrated by this debate because it seems like something I should be able to understand, but it’s all written in Chinese.

    Clearly what you and I, or the government decides to spend money on affects the economy. But I’m having trouble connecting that uncontroversial notion with inflation, the Fed, and money “injections” (whatever that is).

  4. Chris P says:

    I may be way off but this is how I’m interpreting Sumner. If the Fed bought bananas this would bid up the price of bananas and confer a benefit to banana producers. But if the fed buys treasuries from banks this won’t bid up the price and hence will confer no benefit to the banks.

    But it seems he’s focusing on only the first recipient of the new money. Its not just the first recipient that benefits on the net, but also the 2nd, 3rd, 4th, etc. Each benefit progressively less than the other until those far enough removed from the injection point actually end up worse off on the net.

    Just like its not just the banana dealer that benefits from the increased demand for bananas, its not just the bond dealer that benefits either. Even if Sumner can prove the bond dealers see no increase in their income (what seems to me to be a dubious claim) he still has said nothing about those who also benefit down the line. And I get the feeling like he just doesn’t grasp this concept. Instead preferring to focus only on the first recipient.

  5. Nick Rowe says:

    Bob: Of course whoever gets the printing press benefits.

    Printing money is monetary policy. What the government decides to spend that money on is fiscal policy.

    Do the math, and figure out how much revenue the government gets annually from printing money on average. (A ballpark estimate will do). Now compare that with the revenue the government gets from other taxes. It’s about two orders of magnitude smaller. (Seigniorage is about 1% of total taxes.)

    Cantillon effects are about 1% as big as all fiscal policy effects.

    If Cantillon effects cause a discombobulation in the time structure of production, how would you describe the total impact of fiscal policy on the time structure of production? What word describes something that is 100 times bigger than a “discombobulation”? Why aren’t Austrians expending 100 times as much ink on fiscal policy?

    Cantillon effects are peanuts. Do you guys have a peanut allergy?

    • skylien says:

      If this is peanuts, how can we have zero percent interest now? How can zero percent interest rates not disrupt the timestructure of production?

      Where do you think would the interest rate be today if the base money supply still was at the 2008 level of about 0.8 trillion today?

    • RPLong says:

      “Do the math, and figure out how much revenue the government gets annually from printing money on average. (A ballpark estimate will do).”

      Correct me if I’m wrong, but isn’t it true that, under a Misesian framework, this is impossible since the government can’t calculate such things? Where do Market Monetarists stand on the Socialist Calculation Debate?

    • Daniel Kuehn says:

      re: “Cantillon effects are peanuts. Do you guys have a peanut allergy?”

      +10 for Nick.

      Don’t worry Bob – yours is my “quote of the day”, but this is good too.

    • Greg Ransom says:

      Nick, the Fed isn’t alone in expanding money and credit and related forms of purchasing power. And look at the massive growth and then collapse in shadow money in the US over the last decade. The stuff that changes the structure of relative prices yo-yo’s well beyond the Fed Cantillon Effect you are talking about.

      But there is more to the story, isn’t there?

    • Christopher says:

      Printing money is monetary policy. What the government decides to spend that money on is fiscal y.

      Is it even possible to have monetary policy without fiscal policy then?

      If I understand you correctly you are kind of saying:

      It’s not guns that kill people, it’s bullets. The percentage of people actually killed by guns (eg through a hit on the head) is peanuts.

    • skylien says:

      Also if you sum up the revenue of the government in the last 5 years you are roughly at 10-12 trillion. A base money expansion of about 2 trillion, is a bit more than 1%. I think it is a mistake only to reckon the interest on the bonds as seigniorage, since the FED never lets its balance sheet decrease substantially. The exchange of an IOU from the government for USDs from he FED is a shell game.

    • Greg Ransom says:

      If I thought the money & credit effects that Hayek is talking had been internalized, I’d count the shift now to the question “how big” to be conversational progress.

      But I don’t think that.

    • Greg Ransom says:

      Nick, do you really think this captures Hayek’s macro? Explain why you think that.

      >>

      Bob: Of course whoever gets the printing press benefits.

      Printing money is monetary policy. What the government decides to spend that money on is fiscal policy.

      Do the math, and figure out how much revenue the government gets annually from printing money on average. (A ballpark estimate will do). Now compare that with the revenue the government gets from other taxes. It’s about two orders of magnitude smaller. (Seigniorage is about 1% of total taxes.)

      Cantillon effects are about 1% as big as all fiscal policy effects.

      If Cantillon effects cause a discombobulation in the time structure of production, how would you describe the total impact of fiscal policy on the time structure of production? What word describes something that is 100 times bigger than a “discombobulation”? Why aren’t Austrians expending 100 times as much ink on fiscal policy?

      Cantillon effects are peanuts. Do you guys have a peanut allergy?<<

    • Major_Freedom says:

      Printing money is monetary policy. What the government decides to spend that money on is fiscal policy.

      So monetary policy presumes fiscal policy, since every act of printing money entails decisions on who gets it and for what.

      Do the math, and figure out how much revenue the government gets annually from printing money on average. (A ballpark estimate will do). Now compare that with the revenue the government gets from other taxes. It’s about two orders of magnitude smaller. (Seigniorage is about 1% of total taxes.)

      The revenue the government gets from seignorage is not the issue being debated here. It also includes specific people in the public.

      The Fed has created trillions of new dollars since the financial crisis. Most of that new money went to the banks. That depreciated everyone’s money, but only the banks received new money. You can’t see how that favored the banks, and by quite a substantial degree?

      Cantillon effects are about 1% as big as all fiscal policy effects.

      This is incorrect. The Cantillon Effect is not limited to the government. When the Fed is sending trillions of new dollars to the banks, it applies there too.

      If Cantillon effects cause a discombobulation in the time structure of production, how would you describe the total impact of fiscal policy on the time structure of production?

      Fiscal policy does not discombobulate interest rates anywhere near as much as monetary policy. It’s orders of magnitude smaller.

      What word describes something that is 100 times bigger than a “discombobulation”? Why aren’t Austrians expending 100 times as much ink on fiscal policy?

      Because, contrary to your beliefs, the Cantillon Effect is not limited to the state, or it’s 1% seignorage.

      Cantillon effects are peanuts. Do you guys have a peanut allergy?

      No, they are like an elephant. You think the elephant is not in the middle of the room if you ignore it?

    • guest says:

      Why aren’t Austrians expending 100 times as much ink on fiscal policy?

      Because monetary policy enables the fiscal policy:

      War and the Fed | Lew Rockwell
      http://www.youtube.com/watch?v=Tl9lS5k7H5M

      Keep in mind that it’s not just the money printers who benefit from Cantillon Effects, but their cronies, as well.

      The cronies couldn’t discombobulate nearly as much without the currency debasement.

  6. JP Koning says:

    Cantillon wrote in terms of gold mines so to stay in full Cantillon mode, can I switch the printing press to a suddenly-discovered gold trove? Say you find 50 tonnes in your basement which would double the existing amount of gold in existence. If you can hide the discovery from the world and slowly buy stuff with it, you’ll be able to buy way more stuff than if you first announced your find and then started to buy. If you pre-announce, people will already have moved up prices. Furthermore, if people are omniscient data-sniffers, then even if you try to hide it they’ll still have moved up their prices. I’d love to have your gold trove, but I’d rather that you didn’t tell the world that you’ve discovered it before giving it to me (and I’d rather that people weren’t omniscient data-sniffers.)

    Personally I think the real world is somewhere between rational expectations and less-rational expectations, so Cantillon’s idea that there might be non-neutralities seems reasonable to me. How big, how consistent, and how sustained is the question.

    • Greg Ransom says:

      Tell me how this works:

      “If you pre-announce, people will already have moved up prices.”

      Who does this? Who do the calculate the effects on *their* prices?

      Who moves first? Why?

      Economists are talking about thought experiments with numbers and little boxes being moved around int there head.

      Its all magic.

    • Major_Freedom says:

      People can’t raise their prices unless there are others able and willing to pay them. If my employer and his customers cannot pay more because they don’t have enough money to pay it, then how can a mere inflation announcements do it? What, is everyone secretly stashing away trillions of dollars to offset any future inflation announcement?

    • guest says:

      Cantillon wrote in terms of gold mines so to stay in full Cantillon mode, can I switch the printing press to a suddenly-discovered gold trove? Say you find 50 tonnes in your basement which would double the existing amount of gold in existence.

      Yes, you’re absolutely right. Even spending new commodity money, such as gold, will result in the Cantillon Effect, and prices in terms of gold will rise; The ratio between gold and silver will change, and silver will become more valuable in relation to gold..

      But in a free market there would be no general crash, because gold isn’t credit, and it’s durable. Crashes happen when the CREDIT supply contracts.

      • guest says:

        Tulipmania, et al, will come up, so let me share these:

        The Truth About Tulipmania by Doug French
        http://mises.org/daily/2564

        (I started this next one, but haven’t finished it.)

        Early Speculative Bubbles and Increases in the Supply of Money by Doug French
        http://mises.org/document/3628/Early-Speculative-Bubbles-and-Increases-in-the-Supply-of-Money

        This book is the first (and only) book to solve the mystery of the most famous bubble in world history: Tulipmania in 17th century Netherlands. It Is a legendary event but explanations have been lacking. People blame irrational exuberance, free markets, and an unleashed aristocracy.

        Although each of these episodes is well documented, this book examines the monetary interventions that engendered each of these events showing that not only the Mississippi Bubble and the South Sea Bubble were caused by government meddling, but Tulipmania was as well.

  7. Sheldon Richman says:

    “Sheldon claimed that mainstream economists overlook that part, which is again wrong.”

    I didn’t mention mainstream economists, but I guess when they go to a football game and see the teams huddling, they think the players are talking about them. I was writing for a popular audience, and the overlookers I had in mind are the pundits, op-ed writers, and television commentators, from whom most people get their economic information.

    • Major_Freedom says:

      Your article is being misinterpreted by its critics, it is being misintepreted by the critics’ followers, and all you did was point out an obvious, truthful point, that it matters who gets the new money first, bankers or Joe Sixpacks.

      Talk about stirring up a hornet’s nest. I guess inflationists don’t want to believe their worldview is elitist.

      • Tel says:

        Now we have sub-categories: Champaign inflationists, and Sixpack inflationists.

        Steve Keen is at the head of the crowd with the Sixpack inflationists, he has been pushing for broad helicopter drops for years now.

        http://www.debtdeflation.com/blogs/2011/12/03/my-hardtalk-interview-transcribed/

        We actually had a brief Sixpack helicopter drop in Australia late 2008, early 2009 where they gave approx $800 per family, which was relatively cheep and got people past the worst of the initial shock. It’s a bit easier to explain the government debt to people when you can point out that they got something.

        • Major_Freedom says:

          It’s impossible that the $800 per family could have had any effect. After all, considering how the Australian population had plenty of time and plenty of reminders about the Sixpack inflation, then it means all consumer goods sellers must have instantly raised their selling prices, which means each family was no better off than before.

          Right? Right?

          • Tel says:

            Well the rapid crash of housing and share prices happened in September 2008 (I think), so that’s a big ripple of new information for the markets to digest. Then the Aus govt response to that was announced in October 2008, and the first part of the implementation happened in December.

            http://www.smh.com.au/business/rudd-unveils-104b-stimulus-plan-20081014-50a6.html

            Then the RBA dropped interest rates quite rapidly also in December 2008, and dropped them again a few months later. So yeah, it all happened pretty quickly. Mostly this new information to the market was a blatant attempt to counter the panic of the first ripple of information coming from the USA.

  8. RPLong says:

    Mr. Murphy,

    As far as I can tell, you have this one totally pegged. (Not that anyone cares what I think LOL)

    I think the Market Monetarist crowd agrees that both the government and the banks receive some benefit in the form of profits. I think when they say “It doesn’t matter who gets the money,” they are saying that when it comes to the macroeconomic impacts of monetary policy, the policy could be conducted through anyone – either a bond seller or Robert Murphy in his basement.

    I haven’t read anything that would make me inclined to disagree with them about that claim.

    However, I cannot for the life of me figure out why they are hand-waving the fact that monetary policy implementation does most definitely benefit specific individuals exactly as you have described. Just because something doesn’t impact the ultimate endpoint of a given monetary policy doesn’t mean it doesn’t matter AT ALL. I understand that they may not want to talk about it, but at least acknowledging the point would be worthwhile, if they’re interested in engaging in a good-faith discussion of it.

    Sumner’s use of the government salary example is quite telling, isn’t it? Obviously a salary increase to specific individuals is a definite benefit to those specific individuals. Why is it so difficult for the Market Monetarists to just say so?

    • RPLong says:

      Where is Jonathan Finegold Catalan, by the way? I feel like he would add to this discussion.

    • Greg Ransom says:

      What if it’s a free banking regime and the guy sets up a marginal reserve bank.

      Does that matter?

      Would it matter if there are regional restrictions on banking and branch banking.

      Etc.

  9. Chris P says:

    RPLong,
    It’s difficult for them to say so because they are advocating large monetary inflation. Imagine you’ve been a huge champion on money printing for macro economic reasons your entire career and have made a name for yourself doing so. Then along comes someone who basically says you are advocating a policy of wealth redistribution from poor to rich and gives solid theoretical reasons why this is so. It’s a bit of a slap in the face isn’t it? I wouldn’t expect them to take it lightly.

    • RPLong says:

      I hadn’t really thought of that. Very fair point.

  10. Transformer says:

    Nick Rowe’s point is that the fiscal side-effects of monetary policy (seignoriage and other distributional aspects) are dwarfed by the fiscal-effects of real fiscal-policy. And fiscal policy could be used anyway to reverse out any unwanted distributional side-effects of monetary policy.

    This is a good point and puts the discussion into context. It also weakness ABCT which is all about the distributional effects of monetary policy and Rowe has just shown them to be trivial.

    However, while the effects may not matter very much in the real economy , the Austrians are right to say they do exist – I’m pretty sure Sumner is still outright denying this.

    • Nick Rowe says:

      Transformer gets it.

      (I don’t think Transformer is quite right about Scott though. I *think* Scott is saying it doesn’t matter *which particular person* the central bank buys the government bonds or gold or whatever from. Except for the commissions, but then we are talking 1% of 1% of regular fiscal policy..)

      • Greg Ransom says:

        Transformer gets Nick, but he doesn’t get that Nick does’t real engage Hayek’s ‘loose joint’ mechanism.

        If a machanism stands outside your conceptual scheme, you can’t very well be telling anyone how big or small it is.

    • Major_Freedom says:

      How about non-fiscal side-effects of inflation in the market?

      ABCT doesn’t claim that the sole motive force is the initial inflation. It claims that the originating force is the initial inflation, but that the other motive forces are in the market, by way of “discombobulating” economic calculation from market actor to market actor.

      You guys are both wrong to assume that a 1% seignorage (and we can argue about that) is the only redistribution taking place with inflation, the sole Cantillon Effect, and thus the sole motive force for ABCT.

      ABCT is a theory of hampered markets, not just the hamperer.

      I hope neither of you believe that just because inflation leaves the state and goes to the market, that the inflation is instantly and perfectly efficiently allocated by God-like human beings who know what a free market process otherwise would have looked like, such that they allocate spending, capital and labor in ways that mimic the free market. If you did that, then you would be denying that the Fed has any effect on the market at all, because no matter what the Fed did, everyone in the market would nevertheless behave as if it isn’t even there.

      Obviously neither of you would believe that, which means the inflation goes well, well beyond the fact that inflation enters the market at specific points, and raises some people’s incomes. ABCT is about distortions to prices, not just t-bond prices. Interest rates, not just t-bond yields. Relative prices, not just the prices of t-bonds relative to everything else.

      Transformer is getting what Nick is saying, but unfortunately Nick isn’t getting what the Austrians and Richman are saying.

      • Transformer says:

        Can’t Austrian’s just say that ABCT is a theory about how artificially lowered interest rates cause distortions to the structure of production.?

        No one seems to be denying that monetary policy can keep interest rates low.

        • Major_Freedom says:

          Sure, but the Cantillon Effect is one of the core principles for WHY the business cycle occurs the way it does, according to Austrians. You said it was “trivial”. I was just responding to that.

          • Transformer says:

            I think you could build ABCT with just extra money being “injected” via the banks who lower the interest rates as a result. If prices are sticky then you then have artificial lengthening of the structure of production.

            No obvious Cantillon effects (though I guess this depends upon how you define these effects – seems everyone has their own idea)

            • Major_Freedom says:

              You just described an example of the Cantillon Effect.

  11. Blackadder says:

    Bob,

    In the example you provide you clearly benefit from creating the extra money. It seems like the debate is really about whether the people you buy the gold from benefit because they “get the new money first.” On that question JP Koning is right. If you assume rational expectations then it doesn’t matter, but to the extent there are imperfect expectations it might matter some.

  12. PrometheeFeu says:

    Darn you Bob! I was preparing a post making a good joke about how the person who is first in line does benefit, it’s just that that person is the government, not the banks.

  13. Major_Freedom says:

    Murphy:

    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.

    Please do not stop the analysis there. Keep going with it. If other asset holders benefit when the Fed buys, say, MBS, then the “group that benefits” includes those individuals, and excludes every other individual, who not only pay the higher prices to the benefited asset holders in question, but they also do not receive an equivalent offsetting money increase to nullify their now depreciated money. The initial receivers get a money influx, and the asset holders who benefit indirectly get a money influx from the remaining part of the population of money holders.

    • PrometheeFeu says:

      “but they also do not receive an equivalent offsetting money increase to nullify their now depreciated money”

      No. Look at what you just said: their money is depreciating right? Which mean the price of all assets it rising. So the offset doesn’t come from them receiving money. It comes from the price of their assets rising, just like everyone else. It just so happens that the people “first in line” get to immediately convert their spoils from higher asset prices to money from the Fed. But nothing is stopping you from doing the same.

      • PrometheeFeu says:

        By doing the same I just mean selling your now-higher-priced assets

        • acepl says:

          And the MAJORITY of those other asset holders have one real asset to sell: work. For selling of which they will get paid AFTER rise of prices of all other assets. Or, from other end, they will have old money for paying for new prices. Either way, they were royally screwed.

      • Major_Freedom says:

        So the offset doesn’t come from them receiving money. It comes from the price of their assets rising, just like everyone else.

        Right, just like everyone else. But the MONEY, that is NOT equally dispersed. Only the sellers to the Fed get the new money, which means they are relatively better off than those who did not receive the new money, but whose assets rise in price just like everyone else

        If the asset prices rise for everyone, but only some people receive the new money, then it is not difficult to see how there is a relative benefit to the initial receivers (and thus relative loss to those who receive the new money later on).

        It just so happens that the people “first in line” get to immediately convert their spoils from higher asset prices to money from the Fed. But nothing is stopping you from doing the same.

        Uh dude, the Fed only deals with the primary dealers. Of course there is something stopping me from receiving money from the Fed. The police, congress, the courts, etc.

        • PrometheeFeu says:

          “Uh dude, the Fed only deals with the primary dealers. Of course there is something stopping me from receiving money from the Fed. The police, congress, the courts, etc.”

          Primary dealers don’t get free money. They have to sell their assets to the Fed *at the market price* in order to get their money. When the price of assets rises, there is nothing stopping you from selling your assets just as the primary dealers are doing. It just so happens that the primary dealers are selling to the Fed while you are selling to somebody else. You’re still getting the same amount of money for your assets as the primary dealers.

          • Major_Freedom says:

            Primary dealers don’t get free money.

            Irrelevant, but sometimes they do. Sometimes they get loans at below market rates. The difference is free money.

            For the money they get by selling assets, they get a higher prices than they otherwise would have gotten had they sold in a non-inflation free market. The difference there is free money.

            It just so happens that the primary dealers are selling to the Fed while you are selling to somebody else. You’re still getting the same amount of money for your assets as the primary dealers.

            Then those who sell to me relatively lose compared to myself and those who sell to the Fed!

            I am not complaining about myself not benefiting. I am saying SOMEONE will necessarily lose with inflation. That is why it is insidious. Not everyone can buy t-bonds and sell them to others at higher prices. For the only way to gain from owning higher priced bonds is to sell them, which necessitates a population of people who did not buy t-bonds at their initially lower price!

            • PrometheeFeu says:

              “For the only way to gain from owning higher priced bonds is to sell them, which necessitates a population of people who did not buy t-bonds at their initially lower price!”

              You’re assuming your conclusion. Why would there have to be someone who gains? It’s inflation right? The price of everything rises. What if the price of everything rises proportionally?

  14. Nicholas Glenn says:

    Here is a paper from Selgin that touches on the problem with having primary dealers. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1959602

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