# The Cantillon Effect ### T - [Tweet](https://twitter.com/i/status/1460242310420123651) by [@SahilBloom](https://twitter.com/SahilBloom) on [[November 15th, 2021]]: - The Cantillon Effect is the most important economic concept you’ve never heard of. - Here's a breakdown of what it is (and why you should care): [pic.twitter.com/ZWWRo3pqu7](https://twitter.com/SahilBloom/status/1460242310420123651/photo/1) - 1/ Richard Cantillon was an Irish-French economist and philosopher born in the 1680s. - He achieved success as a banker—which he attributed to the formidable connections made through his family and employer. - At a young age, he had learned of the impact of proximity to power... - 2/ Around 1730, Cantillon wrote a paper—Essay on the Nature of Commerce in General—which is considered a foundational work in the study of the political economy. - It was widely circulated in manuscript form, though it was not published until 1755, well after his death. [pic.twitter.com/9l5xR9V3AL](https://twitter.com/SahilBloom/status/1460242315595989002/photo/1) - 3/ In the paper, Cantillon posited that the early recipients of new money entering an economy will benefit more significantly than those it trickles down to. - In other words, the "flow path" of the new money matters! - 4/ In 18th century terms, those closest to the King—the source of money/power—benefitted first when new money entered the economy. - Broadly, Cantillon observed that new money creates distributional effects based on where it enters the system. - The Cantillon Effect was born... - 5/ Let's use a (very) simple story to illustrate Cantillon's central point: - Imagine you live in a tiny, enclosed island society. - One morning, you wake up to find a package on your doorstep. - You open it up and see that it has $1 million in it. - Great! But now what? - 6/ No one else knows you received this package. - You now secretly have $1 million new dollars. - Naturally, you start spending it (and maybe investing it) quickly. - Prices are still low, because no one knows these new dollars exist yet! - Your standard of living improves rapidly. - 7/ You buy yourself the nicest house, the most beautiful clothes, a bunch of land—and still have some money left over. - But now, people see and feel this new money flowing through the system. - Prices begin to rise as supply has yet to "catch up" to the new demand. It takes time. - 8/ So while the money improved your life, it didn’t benefit others in the same way. - The sellers of the goods—who received your cash—now face rising prices when they consume. - Same with the workers who produced the goods. - There were distributional effects—the flow path mattered! - 9/ This is—quite obviously—an ultra-simplified example, but it gets at the essence of the problem that Cantillon highlighted. - Proximity to the source of new money is relevant—the entry point and flow path have distributional consequences. - So why should you care today? - 10/ Well, with the "money printing" activity of central banks globally and an expanding wealth inequality problem, mentions of the Cantillon Effect have accelerated. - It's a useful lens through which to evaluate the monetary and fiscal response to COVID—and its potential impact. - 11/ Here's a (very!) simple view of what I see: - The Federal Reserve's escalating asset purchases have an injection point at the top. - Direct stimulus checks—on the other hand—have an injection point at the bottom. - The former was much larger $ than the latter. - 12/ The asset purchases—and rock-bottom interest rates, among other things—generally benefit asset owners (the wealthy). - Those with a significant portion of their net worth in equities, real estate, or similar assets have benefitted significantly over the last 18 months. - 13/ Wage earners—who received some degree of support but did not benefit in the same way from the asset appreciation—are getting the short end of the stick. - Inflation—particularly across food and energy prices—will have a disproportionate impact on their standard of living. [pic.twitter.com/UQBgntWRrB](https://twitter.com/SahilBloom/status/1460242333228847105/photo/1) - 14/ By now, everyone has heard that inflation is running hot in the U.S. - But perhaps more importantly, it's also running disproportionately hot—as exhibited in this chart from @Business this week. - So what do you think? Was Cantillon right? - And what can we do about it? [pic.twitter.com/QQvG9S2WNe](https://twitter.com/SahilBloom/status/1460242338392027151/photo/1) - 15/ I hope this short thread provides you with a solid foundation of understanding on the topic. - This should not be a political debate. - It should be a grounded discussion we all have when we consider the impact of various monetary and fiscal policies proposed by our leaders. - 16/ I’ve personally been using [@Kalshi](https://twitter.com/Kalshi) and its monthly inflation markets to track sentiment around inflation. It’s worth checking out (for the data, or as a portfolio hedge!). - The November market is below. - (NOT sponsored, just enjoying the platform). [Kalshi](https://kalshi.com/market-groups/CPIR2) - If you enjoyed this or learned something new, follow me [@SahilBloom](https://twitter.com/SahilBloom) for more threads on business and finance. - I write about these topics in my newsletter every single week. Join the 45,000+ others and subscribe below. [The Curiosity Chronicle](https://sahilbloom.substack.com) - We cover interesting ideas and trends in business and technology on our new show—Where It Happens. - Sign up at the link below to join the Discord community and be a part of the discussion. - [The Room Where It Happens](http://TRWIH.com)