How does the Cantillon Effect increase Inequality?
The Cantillion Effect refers to the inequality that arises when some people get preferred access to newly “printed” money.
Cantillon also had a theory in which the beneficiaries of the state creating the currency is based on the institutional setup of that state. This essentially means, “he who was close to the king and the wealthy”, likely benefitted from the distributional choices of currency through the system.
As new money is created, the first recipients (known as cantillioinaries) are able to make purchases before the prices increases due to the purchases the cantillionaires make with the newly printed money.
The general rule is that those closest to to money printer benefit from a Cantillion Effect.
Example:
Blackrock receives a benefit when the Federal reserve purchases their bonds as part of Quantitative Easing.
Blackrock is able to buy up homes across the country at the old prices, before the price increases due to the purchases made with the new money.
To see the inequality at work, Blackrock then rents out the homes to young Americans (and others) who can’t afford to purchase a home at high prices.
The danger is that this inequality becomes entrenched when young people (and others) are unable to afford to buy a home.
Supply Chain
As supply chains deliver products, price increases are passed up the chain.
- Chinese Supplier sells T-shirts to an American Supplier,for a $1 higher price
- American Company sells T-shirts for $1 more.
- American workers have to purchase the T-shirts at a higher price, but wait up to 1 year to get a raise.
- In the meantime, the public are stuck paying higher prices at unchaged wages.
Who are the Cantillionaires?
Cantillionares are those people who benefit from their proximity of the money printer.
In a Bitcoin-based system, the Cantillion Effect would be eliminated because new Bitcoin is awarded through a competitive mining-process. Anyone can mine Bitcoin. There is not a special benefit from working for the finance industry or a company whose bonds are being bought by the Federal Reserve.
Since 2009, the Federal Reserve has bought or manipulated the market to support the issuance of more corporate bonds. Rather than invest the proceeds in productive purposes, the CEOs of these companies divert the proceeds into stock buybacks.
They essentially go into greater debt (borrow money by issuing bonds) and use that money to inflate their stock prices.
The Fed “money printing” gives the CEOs and other corporate leadership an easy way to boost their stock price and “earn” their bonuses.
It also benefits stockholders, a group that dis-proportionally benefits the top of the income scale.