qt4jo

There’s a bit of denial out there about the redistributive effects of expansionary monetary policy, and the theoreticians go round and round about it. Cantillon effects are not supposed to apply in asset markets or credit markets, because of some magic in them that I won’t try to dispute. The idea of a Cantillon effect is usually described as a counterfeiter’s advantage, through monetary policy. Even though the long-run effect of an increase in the quantity of money, either by a counterfeiter’s printing press or the official printing press, will be to dilute the existing money and drive up money prices in general, when the counterfeiter is done running his press, he’s standing next to a big pile of money. He doesn’t look at his counterfeiting as pointless, he doesn’t say, “Well there’s no use even doing this; I’m just going to be faced with higher prices.” Because he can go out and spend his counterfeit bills at existing prices, he gains, in spite of the price inflation, because he consumes ahead of it. And we would expect a similar thing to occur during a wave of expansionary monetary policy. So who is standing next to the big pile of money when the Fed makes one? Well, let’s say this: It’s not the poor.

The FOMC increases the money supply by buying assets on the open market, like any other buyer, if that other buyer had an infinite supply of money. They set out targets (either stated or not) to buy x number of billion dollars of such and such types of paper. It is often said that open market transactions differ from counterfeiting (particularly in redistributive effect) because the assets have to be exchanged for the cash; the firms that have access to the open market transactions window do receive money, but they must give up assets for it. They do not have a counterfeiter’s type of gain, because of this cost, it is claimed. The Fed, it is argued, does not subsidize anybody with its power of the printing press.

So here’s my thought experiment. The Federal Reserve’s assets currently consist of securities typically traded among banks, funds, Wall Street firms. There’s government paper in there, along with that pile of mortgage-backed securities they grabbed up during Bernake’s heroic “rescue” of the financial sector. What if we simply changed the type of assets that the Fed sets out to purchase. Afterall, any asset, or any form of property, has a market price, and the people who bring their assets to the Fed to redeem them will receive no particular counterfeiter’s benefit over their neighbors, because they must surrender their assets in order to receive the Fed’s cash, right?

So let’s have the Federal Reserve announce plans to purchase $40 Billion worth of used Hondas per month, as they announced and performed with mortgage-backed securities. Sure, you can sell your Honda to the Fed, but then you’ll be out a Honda, so it’s not like the Fed’s giving you anything, right? Of course that’s nonsense. An additional huge buyer with a huge wallet, looking to accumulate not a number of Hondas but a total value of Hondas, completely changes the demand situation; the asking prices you see in Auto Trader will be yanked up with incredible violence, as the amount of money spent per month on Hondas in the US goes from $x to $40 billion+$x.

And wasn’t this the avowed purpose of TARP and the various rescue measures; to prevent the collapse (ie to inflate) the prices of assets? When the Fed’s measures re-price assets higher than they otherwise would be, the argument of the surrendered assets falls apart; mortgage backed securities whose market price had fallen to zero in the crash were restored to something like their former prices by government action alone. The lone voice of demand for this junk paper got it trading at high prices again, as it shuffled its way from hand to hand and into the hands of the Fed itself. The owner of an asset that has been thus repriced from zero up to whatever it trades at, receives a counterfeiter’s benefit from the Fed for the full amount paid for the junk. He has surrendered an asset of truly zero value, and received for it, cash. And any asset whose price is raised from a to b by Fed’s artificial demand, when sold to the Fed, confers a counterfeiter’s benefit on the seller, equal to b-a. The Federal Reserve’s purchases of assets have had the effect of re-pricing those assets higher, and the gains have been enjoyed by the holders of those assets, at the expense of all of us who will, in due course, feel the effects of inflation.

If they were going to radically re-price risk assets upwards, why not pick another form of government paper? Why not purchase $40 Billion a month of losing lottery tickets? The fact that this exact reform (misguided as it would be) has not been demanded by the Progressives proves to me that either their “we are the 99%!” Social Justice campaign has an enormous blind spot when it comes to the fed giving millions to millionaires, or else that they have entirely adopted the Trickledown doctrine, and sincerely believe that a Trillion dollars to Wall Street is exactly what the homeless man needs.