What is the Cantillon effect and why is it even more important now?

Posted on 10/24/2021


A Cantillon effect is a change in relative prices resulting from a change in the money supply. It is the uneven expansion of the amount of money. 18th-century French banker and philosopher Richard Cantillon coined the term. Born in the 1680s, Richard Cantillon wrote the book “Essay on the Nature of Commerce in General” – also called (An Essay on Economic Theory). Cantillon preceded Adam Smith by a generation.

Since the 2000s, when the world’s largest central banks began to run out of policy tools (lower interest rates), many of them aggressively create new money with each major financial crisis. The current state of the US economy is experiencing an increase in inflation under the Biden administration to record levels, leading to higher prices for energy, blue collar workers and food, but not other commodities and services.

With the creation of the US Federal Reserve and the US exit from the gold standard, the Cantillon effect favored investors and owners over workers (employees) as a whole.

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Cantillon also had a theory in which the beneficiaries of the state creating the currency are based on the institutional configuration of that state. Essentially, this means that “whoever was close to the king and the rich” probably benefited from the choices of money distribution through the system. Since the 1950s, most of the world has adopted Keynesian-style central banks and monetary authorities. In times of financial crisis, these central banks are used to increase the money supply and use large banking institutions and capital market players to “distribute” (lending) capital, calm markets and prevent bank closings. Over time, it’s clear that in the case of US capital markets, many of the big US banks, large private equity firms, and Wall Street are falling well behind these central bank quantitative easing measures, while individual US savers often see increases in inflation in various goods and services. Large financial institutions have access to QE money and make investments and lend money. Prices start to rise before the population has yet received the new money. The blackmail of the phrase by various heads of state to “build back better” can essentially mean who gets the new money from the crisis and where it should be allocated.

By analyzing the current US financial and economic system, tech companies like Amazon.com, which lobby the US government, and US airlines, have benefited tremendously from the US CARES Act. This can also be said of other governments around the world. The COVID pandemic has been a boon for the ultra-rich, according to the World Economic Forum.

Interestingly, with the passage of the CARES law in 2020, which provided for PPP loans for small businesses and universal basic income (UBI) forms, it has avoided the pain of citizens as the COVID government lockdowns have taken hold. an impact on the livelihoods of some businesses. In return for the large-scale UBI in the United States, disincentives to labor and excess money flooded the markets.

While the Federal Reserve is now preaching about the risks of income inequality in the United States and climate change, which is interesting because their QE policies have clearly widened the income gap, what policies can be used to alleviate the Cantillon effect? How do institutional investors, such as sovereign wealth funds and public pension funds, anticipate winners and losers?

Keywords: Federal Reserve System.


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