|1563, Bruegel the Elder|
"Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth"
This post is written for people in 2013 or 2014 who decide to have a debate on the importance (or not) of monetary injection points. This debate already transpired in early December 2012 across multiple blogs. Rather than starting from scratch, here's a bibliography.
The debate kicked off with Scott Sumner's response to this article by Sheldon Richman. From then on, in no particular order, are these posts:
It really, really, really doesn’t matter who gets the money first—part 2
You can start talking about Cantillon effects as soon as central banks start buying bananas
A voice of reason from the comment section
If I buy T-bonds, their price rises. If the Fed buys T-bonds, their price (usually) falls
Scott Sumner and I Have a Failure to Communicate
Resolution of the Sumner/Richman Showdown
You Might Be Talkin to a Market Monetarist If…
I Have a Deal for JP Koning, Scott Sumner, and Nick Rowe
Clarification on Cantillon Effects
Bill Woolsey Replies on Cantillon Effects
One More on Cantillon for 2012
Cantillon effects and non-SUPER-neutrality = does fiscal policy matter?
Defending Hayek against the Austrians
Sumner on Injection Effects
Injection Effects and the Quantity Theory
Selgin on Cantillon Effects
Sumner, Murphy, Richman, and Cantillon Effects
Sumner v. Cantillon
Those Dreaded Cantillon Effects
On Cantillon Effects
It's the rational expectations, stupid
Richard Cantillon on Cantillon Effects
Golden Meteors and Cantillon Effects
Cantillon effects in Africa
If I've missed any other blogs, please post them in the comments section.
What was the final conclusion from all this debate? I haven't the foggiest clue. Unfortunately there's no final arbiter on blog wars. But since this is my blog, I'll go ahead and attach my final thoughts.
I'm only going to respond to the exact comment from Richman that set the debate off:
First, the new money enters the economy at specific points, rather than being distributed evenly through the textbook “helicopter effect.” Second, money is non-neutral. 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. Most wage earners and people on fixed incomes, on the other hand, see higher prices before they receive higher nominal incomes or Social Security benefits. Pensioners without cost-of-living adjustments are out of luck.Say the Fed announces that rather than buying bonds from traders as it normally does, tomorrow it will inject new money by purchasing goods in shops. Upon the injection announcement, savvy traders will quickly bit up financial asset prices to offset the anticipated money injection. Goods prices, on the other hand, do not immediately get updated because shopkeepers don't pay much attention to Fed announcements. So even though shops will be the first to receive the new money tomorrow, shop keepers cannot purchase a larger real quantity of IBM or Google shares—these prices having already adjusted. So the uneven distribution created by new money has little to do with where money is injected. Even if shopkeepers receive the money first, it is the owners of flex-priced assets like IBM shares who will enjoy increased purchasing power—at least until all prices in the economy have adjusted to the new equilibrium.
[Updated with new links]