A clear explanation of the Cantillon effect: proximity to the spigot, not productivity, increasingly decides who gets ahead. That is also why the reserve-currency privilege looks less like a free lunch and more like a slow transfer from wage earners to asset holders.
Fair point that monetary policy will have distributional consequences, some favoring those closest to the spigot or with real assets. But won't accommodative monetary policy that results in lower interest rates also tend to benefit borrowers (e.g., people trying to buy a new home)? And to the extent that expansive monetary policy raises inflation, doesn't that tend to transfer real wealth from creditors to debtors? In other words, aren't the distributional consequences more complex that just a pure benefit to those closest to the spigot?
Very important point. I cut the section about utility of having a 30 year fixed low interest rate mortgage, because that is going to come in a later letter. This is a 12-13 letter series. The issue of the lower interest rates benefiting borrowers is not Cantillon effect, but parallels it. An asset owner with an already extant fixed-rate mortgage can win twice — the asset appreciates, and the debt against it shrinks in real terms. That part of their income used to pay the P and I on their mortgage is "protected" from inflation effectively. But the rest of their income is not protected from the inflation. Their income still needs to rise to keep up with the inflation. (I'm ignoring insurance and property tax here but they will rise following inflation events). US is pretty special having 30-year fixed mortgages that do work to protect us a bit against inflation. Don't pay off a low interest fixed rate mortgage early!
The wage earning renter with savings account just loses--no asset to inflate. delayed wage increase, higher CPI eating away at a static or delayed wage.
The pure creditor loaning at fixed rates of course loses. I'm sure the US government will justify bailing them out when needed. Some sort of systemic risk argument.
Lower interest rates are nifty, for a bit. But they work to push up the house prices because most people buy them with mortgages. So that eats away at some of the advantages of having the low interest rate.
Overall, it would be wonderful if the markets set the interest rate and no one was legally allowed to print new currency units, and fractional reserve banking was treated by the banking system as a high risk process instead of standard practice backed up by the FDIC and with the Fed as their perennial lender of last resort.
But that is not the world we live in We live in a world economy built on fiat currency. It doesn't end well. Thanks for the great points..
I have invented a novel type of fiat physical currency,where every unit is put on blockchain,its part physical part digital. the idea is that in that case number and distribution of units is transparent. www.brics-currency.com
This is absolute Gold! Thank you for putting into well written words what I have been working through for several years now. Keep up the good work - Troy
The spigot story fits 2009 to 2021 reasonably well. It fits 2022 less well. The Fed was shrinking its balance sheet while inflation ran hot, and asset holders took the losses first, which a pure Cantillon channel would not predict. Lower-wage earners also gained ground on prices afterward, per the Autor, Dube and McGrew work on wage compression. So is the split really about printing, or about how tight the labor market is when the printing happens?
You are right to note that the 2022 tight labor market deserves its own place in the story with the rising wages then. Does this make sense to you: Quantitative Tightening happened a bit during that year, although it came after a very impressive QE period, for sure. Banks were creating credit pretty fast so the supply of "money and credit" or "currency and credit" still increased. As to asset price declines--what were they responding to? There was QT (currency deflation), the continued bank credit inflation, and the interest rate increase all during that period. It seems to have been dominantly the interest rate increase that dropped interest-rate sensitive asset prices. Meanwhile, wage-earners started getting some of the delayed advantage of the earlier QE (demand side from the stimulus) as well as the decreasing labor pool from Covid retirements and expanded dependency (labor supply side), and the tight labor market allowed them to job-jump and "ask for a raise" each time. Does that sound logical?
A clear explanation of the Cantillon effect: proximity to the spigot, not productivity, increasingly decides who gets ahead. That is also why the reserve-currency privilege looks less like a free lunch and more like a slow transfer from wage earners to asset holders.
https://paretoinvestor.substack.com/p/the-great-dollar-sacrifice
Fair point that monetary policy will have distributional consequences, some favoring those closest to the spigot or with real assets. But won't accommodative monetary policy that results in lower interest rates also tend to benefit borrowers (e.g., people trying to buy a new home)? And to the extent that expansive monetary policy raises inflation, doesn't that tend to transfer real wealth from creditors to debtors? In other words, aren't the distributional consequences more complex that just a pure benefit to those closest to the spigot?
Very important point. I cut the section about utility of having a 30 year fixed low interest rate mortgage, because that is going to come in a later letter. This is a 12-13 letter series. The issue of the lower interest rates benefiting borrowers is not Cantillon effect, but parallels it. An asset owner with an already extant fixed-rate mortgage can win twice — the asset appreciates, and the debt against it shrinks in real terms. That part of their income used to pay the P and I on their mortgage is "protected" from inflation effectively. But the rest of their income is not protected from the inflation. Their income still needs to rise to keep up with the inflation. (I'm ignoring insurance and property tax here but they will rise following inflation events). US is pretty special having 30-year fixed mortgages that do work to protect us a bit against inflation. Don't pay off a low interest fixed rate mortgage early!
The wage earning renter with savings account just loses--no asset to inflate. delayed wage increase, higher CPI eating away at a static or delayed wage.
The pure creditor loaning at fixed rates of course loses. I'm sure the US government will justify bailing them out when needed. Some sort of systemic risk argument.
Lower interest rates are nifty, for a bit. But they work to push up the house prices because most people buy them with mortgages. So that eats away at some of the advantages of having the low interest rate.
Overall, it would be wonderful if the markets set the interest rate and no one was legally allowed to print new currency units, and fractional reserve banking was treated by the banking system as a high risk process instead of standard practice backed up by the FDIC and with the Fed as their perennial lender of last resort.
But that is not the world we live in We live in a world economy built on fiat currency. It doesn't end well. Thanks for the great points..
top-notch! Thank you for mentioning "corn ethanol farmers" in the ranks of those gulping from the spigot.
Well you talk about what you will present in Septembers Monthly issue???
It is September 30th.
Where is it?
check your inbox in 10 minutes, Scott.
As usual, excellent and right on.
Where is the September issue?
7:40 PM eastern US time it is scheduled to be sent, so it will arrive a few minutes later... I got waylaid by some medical stuff. Long day, sorry.
You are amazingly productive. Keep up the good doctoring in all it's forms!
I have invented a novel type of fiat physical currency,where every unit is put on blockchain,its part physical part digital. the idea is that in that case number and distribution of units is transparent. www.brics-currency.com
This is absolute Gold! Thank you for putting into well written words what I have been working through for several years now. Keep up the good work - Troy
The spigot story fits 2009 to 2021 reasonably well. It fits 2022 less well. The Fed was shrinking its balance sheet while inflation ran hot, and asset holders took the losses first, which a pure Cantillon channel would not predict. Lower-wage earners also gained ground on prices afterward, per the Autor, Dube and McGrew work on wage compression. So is the split really about printing, or about how tight the labor market is when the printing happens?
You are right to note that the 2022 tight labor market deserves its own place in the story with the rising wages then. Does this make sense to you: Quantitative Tightening happened a bit during that year, although it came after a very impressive QE period, for sure. Banks were creating credit pretty fast so the supply of "money and credit" or "currency and credit" still increased. As to asset price declines--what were they responding to? There was QT (currency deflation), the continued bank credit inflation, and the interest rate increase all during that period. It seems to have been dominantly the interest rate increase that dropped interest-rate sensitive asset prices. Meanwhile, wage-earners started getting some of the delayed advantage of the earlier QE (demand side from the stimulus) as well as the decreasing labor pool from Covid retirements and expanded dependency (labor supply side), and the tight labor market allowed them to job-jump and "ask for a raise" each time. Does that sound logical?