In the 1700s, an Irish-French banker named Richard Cantillon noticed something that economists still name after him. When new money enters an economy, it does not arrive everywhere at once. It enters at specific points, and whoever is closest to those points benefits most.
The order of arrival
- Governments and central banks create it and spend it, or buy bonds with it.
- Banks and financial institutions receive it next, as reserves, bailouts and cheap credit.
- Asset owners and large borrowers get the credit and buy houses, stocks and companies, pushing their prices up.
- Wage earners and savers get it last, as a raise that arrives after rent, groceries and housing have already repriced.
The people at the front of the queue spend new money at old prices. The people at the back live with new prices and old incomes.
Why it matters
This is the mechanism behind the sense that "everything is expensive and I can't get ahead" even when the economy is "growing". It also explains why decades of money creation coincide with record asset prices and a widening gap between people who own assets and people who do not.
Next
Inflation and dilution were not always the rule. There was a specific day when the last link to hard money was cut. Lesson 6: 1971.