The Cantillon Effect in Our Time

In the year 2020, the Cantillon Effect has never been more topical. All you have to do is replace the discovery of a new gold mine with the ability to print fiat money.

During the month of March 2020, the Fed has just decided to carry out an unlimited quantitative easing program to support the U.S. economy.

Behind the technical name of quantitative easing, you have to understand that it is about printing U.S. dollar. Since the Fed is talking about an unlimited quantitative easing program, it means being able to print U.S. dollar infinitely.

More than 6 trillion dollars have already been printed in just over a month by the Fed. Other central banks follow the same monetary policy.

The question you need to ask yourself is this:

Who immediately benefits from the trillions of dollars printed by the Fed and other central banks?

This mass-printed fiat money benefits banks, hedge funds, or the private equity market. It is also used to buy government debt or mortgage-backed securities.

The Fed, and other central banks, want to ensure that there will be sufficient liquidity in the monetary and financial system.

This massive injection of liquidity has a strong impact on Wall Street. You can see this impact in the evolution of the Dow Jones since the Fed decided to conduct this unlimited quantitative easing program:

Dow Jones evolution year to date

As you can see on the previous chart, the Dow Jones had just lost more than 35% of its value in one month to reach a low of 18,591 points on March 23, 2020.

On the same day, the Fed announced an unlimited printing of the U.S. dollar.

Since the announcement of its unlimited quantitative easing program, the Dow Jones has recovered nearly 30% of its value. The situation is almost identical for the S&P 500.

This increase in Wall Street is in total contradiction with the real economic situation in the United States. Since the beginning of the coronavirus crisis, more than 26 million US citizens have filed claims for unemployment benefits.

The unemployment rate in the United States has now reached 20%, up from 3.5% at the end of February 2020.

There is a total mismatch between the country’s economic situation and Wall Street, with the stock market being artificially inflated.

Behind this discrepancy, the Cantillon Effect will play to its full extent.

This strong inflation of the outstanding money supply of the U.S. dollar will lead to a currency devaluation. Those with diversified financial assets such as real estate, stocks, bonds and gold will be less affected than those with only cash on hand.

Indeed, these assets will increase sharply as a result of the looming currency devaluation.

On the other hand, do you know who has assets consisting solely of cash?

The poorest people of course. The richest people will even benefit from this crisis with the stock market bubble that is likely to continue to grow.

The poorest people will see their purchasing power strongly impacted at the very moment when prices are expected to rise. This is indeed the famous Cantillon Effect in action.