The Cantillon Effect💡

Richard Cantillon is regarded as one of the first economic theorists.

He was born in Ireland in the late 1600s and moved to France in adulthood. After helping to organize payments for Prisoners-of-War during the War of the Spanish Succession, he eventually came to own a bank.

Through his writing, he cataloged his thoughts on the mechanics of capital flows and the patterns of economics.

One of his first insights has since been named The Cantillon Effect.

Cantillon observed that when new currency was added to the economy, great wealth would concentrate in close proximity to its entry point.

Back in the 1700s, currencies were still backed by gold reserves so, he was referring to new gold mines.

Cantillon observed that new gold mining operations would create wealthy owners, who would start to pay more for luxuries, servants, and fancy real estate.

Those markets would see an associated rise in price in response to the greater demand for their services.

Laborers would be incentivized to move to the mining location with higher wages.

It would take an exceptionally long time for this inflation to find it’s way down the common person--if it did at all.

This effectively deepened wealth inequality in 18th century France.

Some economists would argue the same thing is happening today.

We’ve seen the US government struggle to get stimulus checks to individuals quickly or accurately.

Simultaneously, the Fed dropped $1.5 trillion of liquidity into repo markets for banks and hedge funds overnight.

Does that money make it to Main Street?

Approximately 140,000 Yelp-listed businesses closed since early March and remain closed today. Yelp estimates that 41% have shut for good.

Don’t worry, Fed chairman Jerome Powell says that money printing doesn’t contribute to income inequality.

Meanwhile, the financially elite with pipes connected directly to the Fed’s money printer will shop for a yacht to drive next to David Geffen’s.

When we print money, we cannot assume that the money is neutral and will be dispersed evenly.  

That’s hopelessly naive.

The folks that need it the most are not getting it.

Federal taxes are due July 15th. Enhanced weekly unemployment benefits end July 31st.

Oh yeah, and the virus is not slowing down.

Do you expect the money printing will speed up?

Where do you think that money will land?