The Cantillon Effect: Confessions of a One-Percenter

Larry Summers, bless his heart, is back on the Financial Times editorial page. He’s arguing for more stimulus…more spending…more Barack Obama. We should send him a ‘thank you’. He’s been great for business.

A Berkeley economist says we captured 93% of all the income gains since the ‘recovery’ began. Is that all? Maybe we can do better as the ‘recovery’ stumbles forward.

Yes, dear reader, we confess. We’re one. We’re members of the ‘1%’ – the few, the lucky, the rich.

Well, we don’t know if we really qualify for the top 1%…but we’re surely in the top 10%.

If you believe the popular press reports, the top 10% are greedy sons-of-bitches who rigged the world financial system, soured its economy and ruined the lives of millions of decent, hardworking families.

Of course, there are benefits to being at the top. And not just the money. We live in better houses. We live longer. Our women aren’t as fat and our men aren’t as thick.

Besides, somebody’s got to be at the top of the heap. But lately, the distance between the top and the bottom has stretched the socio-economic pyramid into a grotesque new shape, with the rich so far above the poor we can no longer smell their sweat or feel their pain.

Naturally, right thinking economists call for ‘reform’.

Thanks again! We all know the reforms they want – redistribution, taxes, and regulation – are those that play right into our hands. Money talks; politicians have an acute sense of hearing. Besides, we didn’t get to be so rich entirely by our own efforts; these same ‘reformers’ helped greatly.

Gina Rinehart, the richest woman on the planet, can tell the poor that they need to ‘stop drinking, stop smoking and work harder’. It’s not only a convenient myth… it’s also a useful one. Earning money the old-fashioned, honest way is still your best bet… unless you’ve got the government or the central bank in your pocket.

Oops! We’ve let the cat out of the bag.

In economics, the phenomenon is known as the ‘Cantillon Effect‘. Richard Cantillon was an associate of John Law, the world’s first, fully-modern central banker. Cantillon noticed that Law’s new paper money – backed by shares in the Mississippi Company – didn’t reach everyone at the same rate.

The insiders – that is, the rich and the well-connected – got the paper first. They competed for goods and services with it… just as though it was as good as the old money. By the time it reached the labouring classes, however, this new money had been greatly discounted… eventually, to the point where it was worthless.

(Cantillon himself was a beneficiary of this phenomenon. He speculated in Law’s Mississippi Company shares. Then, foreseeing disaster, he sold out at the top. This so enraged the buyers, who were ruined, that they plotted to murder him. Cantillon may have staged his own death to escape them.)

A version of the Cantillon Effect was observed in Soviet gulags and German concentration camps. Victims reported that those who were close to the kitchen were more likely to survive. The food often ran out before it reached those who worked in the fields and forests.

Now, we have the central banks running their printing presses – effectively giving money to their friends in the banking industry. From there, it seeps into the whole financial community, boosting prices for financial assets, which are owned by… you guessed it… the 10%.

Speculators and investors make money, which is why we like it so much. We publish financial information and advice. John Maynard Keynes, writing in 1921:

‘… Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Those to whom the system brings windfalls… become ‘profiteers’ who are the object of the hatred… the process of wealth-getting degenerates into a gamble and a lottery…’

You heard him right… a ‘gamble and a lottery’. Total credit market debt in the US rose more than 30 times since the end of the ’60s, as a percentage of GDP it went up from 150% to 350%. US equities rose 12 times and are now bumping around near the ceiling.

Since the ’80s, wealth building in America shifted, from making things to financing things. And the 10% have changed too, from the bold captains of industry…to the clever lords of finance.

Fortunately, as the system degenerates, more and more people want information and advice about how to get the soup. They turn to the financial press. That’s us! So, to Bernanke, Draghi, Shirakawa, Summers, Krugman, Stiglitz and to the feds everywhere – keep it up!


Bill Bonner
for Markets and Money

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Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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