Productivity | Strategy | Profitability
Productivity | Strategy | Profitability
The Cantillon Effect
In the 18th century, a French banker and thinker called Richard Cantillon wrote about a phenomenon that today bears his name. What Cantillon observed in his book called An Essay on Economic Theory was that money printed by the state was never distributed in an even manner. Those who got the lion’s share of monetary easing were those closest to government. When depicted on a chart, the proximity is unmistakable. Those in bed with government got the biggest handouts, reports Shannon Berkley.
In the modern era, “private-public partnerships” are a handy euphemism for Big Money and political power finally coming clean about the deeply depraved relationship they enjoy. It’s a formalisation of the Cantillon effect in plain sight, and whether special, close interests influenced governments to put them first in line, or whether it was the other way around, makes no difference now. Now the incestuous relationship is coming out. We can see the foolishness of allowing money to invade politics. Even there, which was the symptom and which the cause remains murky. In bygone times, the rulers had all the money.
Wealth and dictatorship were ostensibly one thing. Democracy, as a direct upshot of civilisation, was supposed to put paid to that model for the sake of our egalitarian reality and our practice of universal human rights. It seems it failed. Perhaps simply an unfortunate result of the capitalist model we also consider everyone’s right to pursue, wealth, it seems, always becomes corrupt.
What this means for the common man is the bailout’s not for you. A simple graph depicting how much money went where in the initial bailouts post 2008 — and ever since, and now with the global lockdown too — shows a quite vulgar and obvious truth. Money isn’t neutral, and proportionately small change comes the way of the average citizen, at least in comparison to the hefty amounts that go to vested interests. The institutional architecture of the state eats the lion’s share of the money, which the citizenry in turn has to reimburse the state for in the form of taxes, of course.
That’s perhaps the most obnoxious part — no matter the quantitative easing, other structured bailouts, or simply wanton money printing undertaken by the state, it always comes home to be for the citizenry’s account. Such easy money supply costs the populace somehow — devalued currency, higher prices down the road, a diminishing of services on the back of privatisation — and the citizenry pays for the fact that monetary “rescues” step over the fallen and put “aid” in the hands of big controlling interests, Big Money, the big pals of the state.
HOW THE RICH GET RICHER, WHILE THE NEEDY GET LIP SERVICE
It sounds great. The central bank is going to print a few trillion and dole it out to “the economy.” The problem seems to be the innately corrupt structures within modern society we’ve come to accept as normal. Put another way, you won’t be lining up with millions of others outside the central bank to collect your handout, no. You, powerless citizen, will expect to collect your governmental largesse from a retail bank.
There can be few more ridiculous constructs than for-profit intermediaries between a populace’s central bank and the citizenry. Somehow, however, retail banks have been an established member of society for hundreds of years now. Ensuring that there’s a lot of cheap money accessible to the citizenry through the retail banking sector usually implies two things.
Firstly, it means consumers typically just manage to stay afloat, and perhaps retain their confidence for the future — just enough to maintain them as tax paying citizens. Most of the working world has meagre savings and experiences a constant downwards push, or “money inadequacy”, whether real or imagined.
Secondly, banks start rubbing their hands in glee. Not only do they have low interest rates to pitch as a marketing gimmick, one that obscures their maintenance of vexatious bank fees for everything they can think of, they also have a myriad of ways to capitalise on an easy money supply. While it’s true that they won’t be able to charge a high rate of interest during these times, most are unaware that a bank doesn’t necessarily hand money out and sit around waiting for it to be repaid. Bank business is far more devious than that.
During such “easing for the common man”, banks typically buy up assets and inflate their balance sheets handsomely in the process. Importantly too, a low interest rate doesn’t automatically imply, as broadcaster Max Keiser frequently points out, that demand for goods and services will escalate in an even manner across the economy. There’s typically a lot of collateral damage from monetary easing, and unlike the initial handout, it starts from the bottom up.
On the contrary, to return to the effect on those whom easy money is supposed to aid, the biggest upshot of monetary easing for the average citizen is a rise in costs, brought on precisely by the easing attempt, resulting in a net gain of zero over the medium term. That’s for the lucky ones. In times of economic hardship, many more will find themselves lower down the ladder by the time “normal” returns — if it does.
The words “origination and turnover” are unfamiliar to most, but what they refer to is the fact that banks can make (originate) a loan, extending you a mortgage, for example. Far from tying their money up with you for decades thereafter, however, they’ll sell the loan to investors (turnover) and ideally make a profit on the sale. Now they’ve flipped their easy money and got it back in weeks, ready to rinse and repeat.
It’s avaricious recycling, institutionalised. Again, Keiser and co-host Stacy Herbert have explained the concept many times, yet somehow the average consumer thinks that bank business is still mostly about them. Banks are emblematic of what money houses, wealthy investors, and the mafia do in times of easy money and low interest rates. Basel III and its heavy implications for gold becoming a common currency again are unlikely to change this reality, but Bitcoin might.
GOLD, BITCOIN, INVESTORS AND THE CANTILLON EFFECT
Bitcoin and other cryptocurrencies are not only immune to the Cantillon effect, but they’re actively working, simply by being there, to eliminate the institutionalised criminality that allows “easy money” to be easiest for those who don’t need it. Rather than the legacy distribution of funds in times of woe, DeFi tokens are not amenable to being bent to established purposes. Cryptocurrencies have the ability to rethink money, and thus power on the planet, and that’s no small accomplishment.
When money is injected into a system, those who are most credit worthy (aka those with the most money to repay debt, aka those who need it the least) have almost unfettered access to the liquidity. With bigger aims and grander entitlement, they consume most of what’s available, leaving small change for the man on the street, when it eventually filters down to him.
Of course, that’s not the marketing spin whenever central banks make announcements of quantitative easing, but they don’t have to concern themselves with the ultimate roll out. They have highway robbers they can blame for the insignificant change to your life from their money printing — the retail banks. The central banks wash their hands once the retail banks start the distribution. All this while Big Business and other established interests (also known as lobbyists in the US — where a shameless feast of bribery and corruption has been institutionalised on Capitol Hill) have used their power and influence to direct much of that bailout money towards themselves.
What is the average retail investor to do under these circumstances that seem to have become a new normal? The presses are still rolling, and in spite of the obvious risks of the collapse of fiat, those at the lower end will move still downwards over time. What do smart investors do under such circumstances?
For one thing, they buy Bitcoin. Because it — as well as almost any cryptocurrency you’d care to mention — represents precisely the opposite dynamics of the legacy arena. There’s more to it than bohemian togetherness, however, as the more fungibility a crypto token gets, the more real it becomes, the more mainstream it becomes, and the more it presents as an egalitarian and honest investment.
There is no Cantillon effect for investors to fear if they box clever at this moment in our digital reality. Smart investors won’t look to traditional markets — and certainly won’t be looking to central bank policies — to generate wealth.
Rather, now is a time for extreme diversity, whether extreme in practice or extreme in novelty and risk. Breaking the dynamics of being last in line for a handout requires some unconventional thinking. Smart investing today is unusual investing, but it’s also staying abreast of future trends and growing wealth for the very long term. That reality, that value, is for people, not banks, to decide on. EG