The Cantillon Effect | How the rich utilize recession to become richer
Do you know, what has in common the global recession of 2020 and the one of 2008? The Cantillon Effect!
Cantillion effect
The Cantillon effect is a kind of redistribution of economic resources. It is an uneven monetary expansion.
Cantillion effect is named after the banker Richard Cantillon (1680–1734), who was one of the first authors to systematically discuss economics in his Essay on the Nature of Trade in General.
Cantillon described the first case of gold and silver mining from mines, where the money came into the hands of mine owners and their workers. They then spend them mainly on consumption, demand, and market prices are rising and inflation is taking place. This effect was driven, for example, by inflation in 16th-century Spain, when precious metals from American mines flowed into Spain, but the growth in domestic demand was not supported by a corresponding increase in domestic production.
The opposite is the inflow of money due to the active trade balance when exports of goods and services outweigh imports. In this way, money enters the economy into the hands of traders and producers, who do not increase their consumption so much but invest in expanding their businesses. In such a case, therefore, the volume of trade and production increases instead of consumption and the price level.
If money falls into the hands of those who spend it on consumption, market demand, and the price level rise. However, if they fall into the hands of traders and producers, then they are spent more on investment and production and trade grow more.
2020 is the new 2008
The Cantillon effect is often called the inflation tax. The central bank prints money, but it does not reach all people and companies at the same time. Those who get new money first benefit from it. Those, who are closer to the printing machine.
With the newly printed money, not everyone can win. Someone must lose. But who it win? Guess...
At present, it is mainly the banking sector and large debtors. Those will be the first, who gets to the new money and they will benefit the most because they can buy goods, lands, houses, stocks at pre-inflation prices with inflationary money. That means they get more of everything for lower prices and thereby they increase their prices.
Surely those, who got bailout will benefit too. They didn't make any deposit for a rainy day or they act too risky. Also, they did the stock buybacks with their profits to push up the price of their own stocks. Yes, the companies, who deserve bankruptcy are probably too big to fail again. And the industry must run, the people need some job so employment will not suffer also if those players will be saved. But, is it the right thing? Is it still the invisible hand of the market, who is a decision-maker? Or not anymore? Who decides that?!
In fact, the money-printing might not increase the price, but it can reduce the purchasing power of a currency as a result of increase the number of currency units in circulation. And guess who is responsible for the increase in the money supply? The Central Bank, the one who has the monopoly for issuing money.
Summary
Printing money is not a benefit for the economy, just the production of goods and services is a benefit for the economy.
It might now seem that the whole country will benefit from the printing money. But with the Cantillon effect as described, the most advantageous effect this whole money-printing will bring to those close to the printing machine. And those are not the common people. The scissors between rich and poor will open even more.
Photos: Pixabay
In every situation, the rich always get richer. This is because often times, the opportunities that bring huge wealth require big money to participate. And only the rich have big money to spend.
Kryptarion here!✌
Yes, true. And even in the "bad times", they know how to profit. I am not weeping around that because I cannot do anything with that, but it is good to realize this and got it on the mind.
@tipu curate