What is the Cantillon Effect?

Today we explain what the so-called „Cantillon Effect“ is and why it threatens the stability of the US economy.

Over the past few months, the world has seen an unprecedented acceleration in the printing of money. This has not only set off alarm bells for many market analysts, who believe that this increase in liquidity will be negative in the long term. It has also led to more and more talk of the Cantillon Effect, as Sahil Bloom did in today’s Tweet. Therefore, today we shall attempt to explain to you what the Cantillon Effect is and why it is important.

The Cantillon Effect today

The Coronavirus crisis has strongly impacted the world economy. After several months under the effects of the pandemic, most countries in the world are experiencing severe recessions. This is why the major nations, including the United States, have begun to issue large sums of money in an attempt to stimulate the economy.

This has of course raised the alarm about a possible inflationary crisis. However, after months of rampant issuance, no major increases in inflation have yet been seen in the world. How can this anomaly be explained? The answer is the Cantillon Effect, named after the 18th century economist Richard Cantillon.

He postulated that when large sums of money are issued, inflation does not occur as an immediate effect. Rather, it expands like „honey in a glass“, to use Hayek’s metaphor. This means that initially those who are closest to the newly issued money (banks, large companies) benefit from the monetary expansion. While the poorest end up paying the price later in the form of inflation.

A similar situation to the one we see today, when the issuance of more dollars in the United States has led to record figures on the Bitcoin Machine. But it has not generated significant relief in the population outside the financial market. What could be the definitive proof of the Cantillon Effect as commented by Sahil Bloom on his Twitter account:

„With recent money printing activity and the growing problem of wealth inequality, the ‚Cantillon Effect‘ has become the focus of attention“.