The Cantillon Effect

Since Richard Cantillon has been dead for centuries, the observation he made has entered into the basic economic assumptions that are used by almost everyone. His observation bears his name. 

Yes, the Elites are Drunk on the Wine of the Printing Press.Since Richard Cantillon has been dead for centuries, the observation he made has entered into the basic economic assumptions that are used by almost everyone. His observation bears his name.

In Essai, Richard Cantillon provided an advanced version of John Locke's quantity theory of money, focusing on relative inflation and the velocity of money. Cantillon suggested that inflation occurs gradually and that the new supply of money has a localised effect on inflation, effectively originating the concept of non-neutral money. Furthermore, he posited that the original recipients of new money enjoy higher standards of living at the expense of later recipients. The concept of relative inflation, or a disproportionate rise in prices among different goods in an economy, is now known as the Cantillon Effect.

So if the government is increasing the amount of money in circulation, it helps those who get it first. If the Fed prints money by buying mortgages, the money goes directly to the banks and props up real estate prices. In addition it flows directly to the wealthy--the well connected wealthy. If you want to know why the printing presses keep printing ask yourself that famous Latin phrase cui bono--"who benefits." Or as the Watergate investigators kept saying--"follow the money."

There is an interesting proposal by Australian economist Steven Keen that this process be reversed. His proposal is to give a trillion or two directly to the people. Keen blogs at Debt Deflation. His catch is that the money must be spent on debt reduction. This would be trickle up economics. It would be no more harmful than the current procedure to give the money to the banks, and since this would reduce debt, and we have a debt-based economy, this could be mildly deflationary.

I feel reluctant to endorse this proposal as it seems like curing a hangover with a morning pick-me-up. However things are so messed up that a proposal like this may be the best way out. I would combine it with a budget freeze and medical reform. Then the US could work its way gradually out of the mess it is in.

Of course the chance of such a program being implemented is close to zero. Because of the unlikelihood of any meaningful reform, I think I will blog less about economics. As I have already done with my political posts, I will reduce my economic posts greatly as they are mostly an exercise in futility.

Instead I will blog more about diet and exercise, and religion. While the failure rate for people changing their lifestyle is about 95%, at least it is not 99.9% as it is in politics and economics. I think I will find this much more satisfying and productive.

Watch this space.