Monday, December 10, 2012

The great monetary injection debate of 2012

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:

Scott Sumner
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

Bob Murphy
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

Nick Rowe
Cantillon effects and non-SUPER-neutrality = does fiscal policy matter?
Defending Hayek against the Austrians

Bill Woolsey
Sumner on Injection Effects
Injection Effects and the Quantity Theory
Selgin on Cantillon Effects

Steve Horwitz
Sumner, Murphy, Richman, and Cantillon Effects

George Selgin
Sumner v. Cantillon

David Glasner
Those Dreaded Cantillon Effects

Daniel Kuehn
On Cantillon Effects
It's the rational expectations, stupid

JP Koning
Richard Cantillon on Cantillon Effects

Gene Callahan
Golden Meteors and Cantillon Effects

Kurt Schuler
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]


  1. In your example out of non-asset owners only the shopkeepers see their income keeping up with the asset prices.

  2. No problem, Bob.

    A few other additions:

    Peter, although their income rises since they sell more, I think they would have been better off had they raised their prices in anticipation of the Fed purchases. That way they could have earned the same revenues while selling less physical product.

    1. Kurt Schuler has a contribution:

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