Cantillon Effect - Closer to the Money Printer

"The Cantillon Effect" refers to the idea that changes in the money supply in an economy cause the redistribution of purchasing power among people, disturb the relative prices of goods and services, and lead to the misallocation of scarce resources. The effect is named after Richard Cantillon, an 18th-century Irish economist who wrote about how money creation affects different groups of people differently.

The basic idea is that when new money is created, it does not enter the economy evenly or at the same time. It has a specific injection point and a specific flow path through the economy. For example, if the central bank prints money and buys government bonds from banks, then the banks are the first to receive the new money. They can use it to lend to other borrowers, invest in other assets, or pay their shareholders and employees. The people who receive the new money from the banks can then spend it on goods and services, or save it for later use. The people who sell goods and services to these people can then do the same, and so on.

The Cantillon effect implies that the people who receive the new money earlier benefit more than the people who receive it later. This is because they can buy goods and services at lower prices before inflation sets in. As more money circulates in the economy, the demand for goods and services increases, which pushes up their prices. The people who receive the new money later have to pay higher prices for the same goods and services, which reduces their purchasing power. In other words, inflation acts as a hidden tax that transfers wealth from later receivers to earlier receivers of new money.

So, if you have a lot of cash and the money supply increases, your cash will be worth less money over time. This is because you are a later receiver of new money compared to the people who get it directly or indirectly from the central bank or the banks. You will face higher prices for goods and services without having more income to compensate. This will reduce your real wealth and standard of living.

However, if you have assets that appreciate in value faster than inflation, such as stocks, bonds, real estate, or gold, you may benefit from the money supply increase. This is because you are an earlier receiver of new money compared to the people who only have cash or fixed income. You will see your assets increase in nominal value and possibly in real value as well. This will increase your real wealth and standard of living.