How printing money helps the rich (Cantillon Effect)
There is a lot of talk of governments around the world taking extreme fiscal measures to support their fledgling economies hampered by the devasting impacts of coronavirus.
In most advanced western nations, governments have either opted to pump money directly into the economy through a range of stimulus measures — the purchasing of government bonds and treasuries — thereby increasing the amount of money that banks hold, in the hope that they would lend the extra cash to businesses. Or lowered interest rates (cost of lending and the reward for saving), to their lowest levels reminiscent of the 2008 financial crisis. This inadvertently benefits the rich and wealthy, who are most likely the owners of these assets — also known as the Cantillon Effect.
The key idea behind the Cantillon Effect is that who are closest to the source of money creation i.e. the central bank, benefit the most from money printing. In today’s world, this includes hedge funds, people working in high tech and those in financial services sector. These people witness their incomes rise first, because as discussed above, they are likely to be the primary owners of assets that central banks (with unlimited amount of money) buys. In contrast, those further away from the point of money creation i.e. those working in lower-paid menial jobs, see their real income purchasing power decline, with inflation taking hold as the money trickles down the economy. The extent of inflation obviously depends on what the wealthy do with the extra boost to their income — whether they choose to save or invest.
However, this was not the only way that governments opted to support their economy and counter the Cantillon Effect. In March, at the height of the pandemic, with chart spiking unemployment figures, unseen in modern US history, and images of Americans lining up for foodbanks beemed across screens around the world. The US Congress passed a $2.2tn Cares Act (the largest in history), as part of a wider group of measures to directly give each citizen a $600 weekly jobless benefit boost. With the scheme duly coming to an end on 31 July 2020, questions were raised if it was in indeed discouraging people from seeking work.
Further, at a time when the US experienced its worst unemployment since the Great Depression of 1930’s, one would expect the US stock market to reflect the chilly and uncertain atmosphere of the US labour market. However, this was not the case. In fact, the DOW Jones, NASDAQ and SNP500 all surged to historic highs as the US unemployment statistics were announced. This was in anticipation of congress asking for further monetary stimulus in order to prop up the US economy.
In the UK the furlough scheme and government introduction of £3.5bn package of measures to boost spending and to keep businesses afloat could be said to have the most distortionary income wealth impacts. The adverse wealth impacts made immediate right from the start, with those working in the services, hospitality and lower-paid occupations, first to be made redundant and lose livelihood. In contrast those working in less capital intensive and human capital-intensive sectors, such as tech and financial services faring much better. Indeed, firms that relied less on physical capital and more on intangible assets (knowledge and skillset of their workforce) — the Silicon Valley firms — saw their stock prices surge. Companies like Amazon, Zoom and Ocado, benefited from reduced human interaction with brick-and-mortar stores all but closed and online shopping becoming the domain.
