Have you heard of the Cantillon effect?Wealth inequality is a well documented problem in the United States, and more broadly across the world.This rise in wealth inequality over the past 30 years has to a significant extent been the product of monetary policy fuelling a series of asset price bubbles.Whenever the market booms, the share of wealth going to those at the very top increases.When the boom goes bust, that share drops somewhat - but then comes roaring back even higher with the next asset bubble.Also, those the very top are often diversified, so even if their wealth as a group technically goes down due to a stock market crash, as individuals they are generally fine and it is the middle class that bear the brunt of the damage.The redistributive effects of money creation were called Cantillon effects by Mark Blaug after the Franco-Irish economist Richard Cantillon who experienced the effect of inflation under the paper money system of John Law at the beginning of the 18th century.Cantillon explained that the first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.In accordance with the Cantillon effect, inflation can increase inequality depending on the route it takes, but increasing inequality is not a necessary consequence of inflation. If it happened that the poorest in society were the first receivers of the newly created money, then inflation could very well be the cause of decreasing inequality since they get the money first.Under modern central banking however, money is created and injected into the economy through the credit route and first affects financial markets.Under this system, commercial banks and other financial institutions are not only the first receivers of the newly created money but are also the main producers of credit money.This is because banks can grant loans unbacked by base money.In a free-banking system, this credit creation power of banks is strictly limited by competition and the clearing process.Under central banking however, the need for reserves is relaxed as banks can either sell financial assets to the central bank in open market operations, or the central bank can grant loans to banks at relatively low interest rates.In both cases, central banks remove the limits of credit expansion by determining the total reserves in the banking system. In other words, commercial banks and other financial institutions are credited with so-called base money that has not existed before.Thus, the economics of Cantillon effects tells us that financial institutions benefit disproportionately from money creation, since they can purchase more goods, services, and assets for still relatively low prices. This conclusion is backed by numerous empirical illustrations.For instance, the financial sector contributed massively to the growth of billionaire’s wealth.One of the most visible consequences of this growth of financial markets triggered by monetary expansion is asset price inflation.In a completely sound money system where credit only depends on the amount of saving rather than on fiduciary credit, there is very little room for generalized and persistent asset-price inflation as the amount of funds which can be used to purchase assets is strictly limited. In other words, the phenomenon of asset-price inflation is a child of credit inflation.Asset price inflation predominately benefits the richest in society for several reasons.First of all, the wealthy tend to own more financial assets than the poor in proportion to income.Secondly, it is easier for the richest individuals to contract debt in order to buy shares that can be sold later at a profit. Since credit easing lowers the interest rate and therefore funding costs, the profits made by selling inflated assets bought at credit will be even greater.Finally, asset price inflation coming with the growth of financial markets will benefit those working in the financial sector. It will also benefit the CEO's of the publicly traded companies who will be paid more as the market cap of their company increases.Hence, the correlation between asset prices and income inequality has been, as expected, very strong.Despite this, many economists have failed to see asset-price inflation as a consequence of an inflated money supply.The conclusion is: our monetary system itself increases inequality.https://www.youtube.com/watch?v=rv5xl1AEeQs
Submitted February 01, 2020 at 04:47PM
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