The Cantillon Effect
TL;DR
New money doesn’t enter the economy all at once. Those who get it first profit at the expense of those who get it last.
What Is It?
Named after Richard Cantillon (1730s), it describes the redistribution of wealth caused by inflation. When a central bank creates new money:
- The Insiders (Banks/Government): Get the new money first and spend it at current, lower prices.
- The Outsiders (Workers/Savers): Receive the new money much later, after it has already circulated and pushed up the price of goods (inflation).
Why It Matters
The Cantillon Effect is a hidden mechanism that transfers wealth from the poor and middle class to the wealthy and politically connected. It explains why inequality increases in a fiat-based economy, even when productivity rises.
Analogy: The Honey Pot
Imagine a pot of honey being poured into the center of a table. The honey is highest and thickest right where it’s poured (The Bank). By the time it spreads to the edges of the table (The Worker), it is a thin, sticky mess that has lost its power.