03 Dec 2012

Scott Sumner and I Have a Failure to Communicate

Federal Reserve, Inflation, Scott Sumner 19 Comments

This is really freaky. It’s like with the “top income tax rate in 2013” debacle. Can somebody read the exchanges between Sumner and me in this post–responding to a Sheldon Richman article–and tell me what the heck is going on?

As best I can tell, Scott position is the following:

“You Austrians are nutty for insisting that how the new Fed money enters the economy, can possibly make a difference. Now I admit, if the money enters in one route versus another, of course that makes a huge difference. But what I’m saying is, if you’ll read my post again, is that how the new Fed money enters the economy makes no difference.”

I realize you guys think I’m setting up a strawman. Go read it for yourself.

19 Responses to “Scott Sumner and I Have a Failure to Communicate”

  1. Major_Freedom says:

    This comment is truly bizarre:

    In any case, even if you were right your comment would have no bearing on this post, as the effect on debt held by the public is identical in each of the 4 cases. Recall I was holding fiscal policy constant. So if bond prices did rise, my response would be “so what?” That would happen regardless of how the money is injected–even if it was spent on public employee wages, not bonds.

    This should win gold if they awarded medals for mental gymnastics.

    He is holding fiscal policy constant in all four examples in a way that makes bond prices (allegedly) rise, in order to show that no matter what the Fed buys, oh look, bond prices will rise, and hence, back in the real world, the rise in bond prices that takes place as the Fed is buying bonds, isn’t caused by the Fed’s buying of bonds after all.

    • Major_Freedom says:

      The even weirder thing is that in his 4th example, he writes:

      Newly inject base money is used to pay the salaries of government workers, and as a result less money is borrowed by the Treasury. The Treasury then creates and donates a T-bond to the Fed.

      So if this example sees the Treasury borrow less, how in the world can that square with the other comment I quoted, where it is claimed that debt held is identical in all four examples?

      Not that the answer to this question, or any of these quotes, have anything to do with whether or not the Fed buying bonds has an effect on bond prices.

      It’s like we’ve reached the core of the Death Star, and are learning that instead of a powerful core, there is Alfred E. Newman playing chess with a pigeon.

      • Matt Tanous says:

        I was utterly confused when he claimed that it might not rise NGDP because people that get the new money hoard, but this somehow has nothing to do with the people that get the new money.

        “Or you could talk about cash injections failing to boost NGDP, because the extra money is hoarded. Yes, but once again that depends on factors that have nothing to do with who gets the money”

        I think the ONLY factor that affects whether the extra money is “hoarded” is who gets it. If you give it to Bob and he deposits it in the bank, it will have a completely different effect then if you give it to Joe, and he puts it under his mattress.

  2. Nicolas Cachanosky says:

    I too find Scott’s post a little confusing.

    My attempt to square what I think he’s trying to say (and where I think he falls short):


  3. Tel says:

    I’m struck by one particular comment:

    Even the mortgage backed securities that the Fed is buying are already backed by the Treasury, so they’re already effectively Treasuries as far as the Fed is concerned.

    Really? So “mortgage backed” actually means “treasury backed” which is actually “taxpayer backed”… but, but… that would imply government meddling was directly responsible for the housing bubble and subsequent crash and now the taxpayers are on the hook for an even bigger debt than just the obvious accumulated deficits and implied Social Security and pension liabilities. Oh, that must be a big number or something.

    Egats! Someone better run and explain this to Krugman, because he thinks it was those speculators wot dun it.

    • Matt Tanous says:

      “Egats! Someone better run and explain this to Krugman, because he thinks it was those speculators wot dun it.”

      I don’t think +1 is enough pluses.


  4. Dan says:

    I think I’m at the point where I can’t stomach Sumner any more. I can still handle Krugman because he is such a blatant political hack that I can laugh at him. But when it comes to Sumner, I find he just depresses me because I think he looks at that exchange with you and thinks you are being dense, while we look at it and think he isn’t making any sense. He makes me realize that one of us is clearly crazy.

    • RPLong says:

      At some point, Sumner transitioned from being engaging to being a bit of a market monetarist pundit. I basically stopped reading him seriously at that point. Now I only read his blog for the larphs.

  5. Bala says:

    I still fail to understand how Sumner’s reply addresses the original point, which was this

    “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.”

    Do they or do they not have the benefit of increased purchasing power before prices rise? Is Sumner not guilty of failing to get the basic point or of deflecting the discussion to a tangential and relatively irrelevant issue?

  6. Charlie says:

    He’s saying it matters what the Fed buys, but not who he buys it from. It matters if the Fed buys T-bills or tacos, but it doesn’t matter if he buys my tacos or your tacos. It matters if they buy bonds or stocks, but it doesn’t matter if they buy your stocks or my stocks.

    • Charlie says:

      *No idea why I wrote “he” as a pronoun for the Fed twice.

    • Bob Murphy says:

      Thanks Charlie I will try (if I have time) to re-read Scott’s answers with that theory in mind. I am genuinely open to the idea that he’s not nuts.

    • Richard Moss says:


      But, how does this square with Sumner’s reply of ‘Yes” (@ 11:39) to David Henderson’s question (@ 10:47) as to whether Sumner was denying the existence of Cantillon effects?

      That would not be the answer I would expect him to give if I read him the same way you did.

  7. Transformer says:

    I agree that last week’s discussion on the tax thing was weird. It looked to me like Scott and his supporters in the comments section were just plain wrong. Did you ever get that acknowledged by him ?

    In today’s article I get the impression that he is denying the existence of Cantillon effects whilst acknowledged individual examples of it as if they are just too obvious to be worth arguing over.

  8. LA Liberty says:

    That’s what I’m seeing.
    Must also commend the relentless Greg Ransom and Major Freedom…

  9. William Anderson says:

    SS claims that the change in relative prices comes about because “wages and prices are sticky.” Huh? According to Keynes, they are sticky DOWNWARD, not upward. (That is why he recommended inflation as a way to cut real wages.)

    Prices and wages are not “sticky” upwards, so his claim makes no sense.

  10. Ken B says:

    “responding to a Sheldon Richman article”

    Got a 10 foot pole I can borrow?

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