Guest Commentary: CNN, AT&T, & the Cantillon Effect

An EcPoFi reader in Asia submitted the following message this morning,

The Cantillon effect states that money printing causes a transfer of wealth from the people who hold money (every citizen) to the ones who receive the newly printed money. AT&T and Time Warner represent the D.C.-Manhattan power nexus, and have had access to the 0% policies since late 2008. We the (deplorable) people have had access to 4%, 18% credit card or 25% payday loans.

The leftists are wondering why wealth inequality is increasing. As Piketty’s graph depicts (but he refused to mention) inequality increased during times of expansionary central bank policies of the late 1920’s and during the last 15 years. Inequality decreased when central banks and cartel banks were not expanding like mad and the depressed remains of the free market were allowed to work its way through the centrally planned malinvestments.

Richard Cantillon (1680-1734), dubbed by many as the founder of political economy, demonstrated that monetary inflation does not affect all prices equally or at the same time, but in sequences that depend on the spending behavior of money holders. The early receivers of the new money win at the expense of the later receivers who experience a loss in purchasing power as the quantity of money has been inflated. 

Who the winners are therefore depends on how the new money is initially distributed. For example, during the "quantitative easing" programs in the U.S. in the aftermath of the 2008 banking crisis, banks and Wall Street, in addition to a selection of blue chip companies, were the initial winners as the Federal Reserve effectively bailed them out with newly created money. The losers of this bailout program were everybody else as they paid for the ordeal with a loss in purchasing power of the money they already held. 

An easing of monetary policies has another important effect: it fuels asset prices. In fact, asset prices such as stocks and bonds, are often the first to benefit from lower interest rates and an inflating money supply as they react more or less instantly to an easing in monetary policies. As those who are relatively well off tend to hold a larger proportion of their savings in various financial assets, while those who are relatively worse off tend to hold a larger proportion of their cash in ordinary savings accounts, it is the former class that benefits from monetary inflation. Additionally, those who are relatively worse off tend to have wages that are largely fixed, which means the purchasing power of their income also falls with time. As the commentator above noted, "inequality" therefore increases during times of expansionary monetary policies. Any serious commentator on economic inequality must therefore address the Cantillon effect.