The 18th Century Observation that Explains Nearly Everything Wrong with the American Economy Today
Here’s a thought experiment that, it being the very depths of the summer months might make sense on a level that resonates with some of you.
Imagine you’re 10 years old again. And imagine that every day, the ice cream truck came through your town by a very specific route. You didn’t know when the truck would come through. Sometimes it might show up at 5 am. Other days it might roll through at 10pm.
For the sake of this thought experiment, imagine that the truck’s annoying music was somehow disabled. You can’t hear it coming, so you can’t rush to its location.
Now, the truck never has enough ice cream for every kid in the neighborhood. The only kids who are going to get any ice cream are the kids who are in the earliest 3rd of the route.
No kid is going to camp out on the edge of town for the whole day, missing out on lighting fires in the woods, shooting bb guns at birds or whatever it is that kids do these days.
That means that the kids who get the ice cream are by and large mostly the same lucky ducks who live on those first few streets before the ice cream truck runs out. Maybe every now and then the truck makes it a few blocks further because the lucky kids have had their fill for a few days, but not very often.
Usually, the lucky SOBs in the early part of the route get the ice cream, everyone else gets nothing or sometimes they get some dregs of water ice or dippin’ dots or something equally unpalatable.
Is the ice cream fortune of the earlier kids a consequence of them being especially virtuous or just, hardworking or deserving? No.
If the route the ice cream truck took changed, and the hapless driver drove the route backwards, then the previously lucky kids would be on the business end of watching that truck silently drive through their neighborhood with the “closed” sign on the side window.
The mechanism and method by which the truck driver makes his way through town very specifically impacts certain people more than others.
This observation is everything you need to understand why our current monetary policy necessarily creates dozens of economic and social problems.
Enter, the Cantillon Effect
In 1734 an Irish economist named Richard Cantillon died. Actually, he got murdered by an employee who subsequently burned down his house along with almost all of his work and possessions.
One surviving bit of his work was called Essai sur la Nature du Commerce en General, which was published in 1755 by a friend of Cantillon’s family.
In his work, Cantillon observed that inflationary monetary policy had arbitrary and uneven effects. Some people prospered more than others. Some assets prospered more than others.
This idea is so simple, and so straightforward that it’s not under any kind of dispute by any major school of economics or finance.
It’s an axiomatic truth of monetary policy.
Simply put: inflationary monetary policy helps those who are closest to the money creation. That usually (but not always) includes people in the banking industry, government contractors, the political class and the already wealthy.
The banking industry, if you didn’t know, is hand in glove with the creation of money. Dealer banks in the US get prime deals on interest rates, bond repurchases and rescue plans by the Federal Reserve and other central banks.
Government contractors are frequently first in line for new, giant budgets worth billions or increasingly, trillions of dollars. This money does not come from tax payers: it comes from the central bank creating it and giving it to the government to hand over to said contractors.
The political class can make endless promises for bread and circuses, pay no price for it, and retire to a consultancy for one of the aforementioned contractors. This happens constantly.
The already wealthy own assets most likely to benefit from inflation and they have teams of accountants, lawyers and lobbyists to make it so.
It explains, among other things why productivity has soared but average wages have stagnated.
It explains why wealth has exploded, but wage earners have seen their share of it implode:
It’s why income inequality is on the rise:
It’s why assets like real estate have vastly outpaced wages:
It correlates with higher rates of incarceration:
Children born out of wedlock:
And dozens of other problems.
This might look like a well made cherry picked batch of statistics that are correlated with any number of arbitrary metrics or policies.
Maybe — but only if you don’t realize what happened in 1971. That’s when Richard Nixon ended the gold standard. That meant that the US government’s budget was no longer constrained by reality.
Thereafter, the government was able to create as many currency units as it wanted without having to convert them into gold up on request by creditors.
The difference is stark, but not surprising. The history of monetary governance going back 5000+ years is that when given the chance to run a currency into the ground to benefit themselves, the people managing the currency will do so.
Whether it’s shaving coins for their metal content or printing more currency units or simply adding digits to the account of member banks, the result is the same:
Ruin for most people, massive profits for the monetary authorities and their buddies.
Today this trend is accelerating. The Federal Reserve is going to buy a record amount of Treasury debt every year until the wheels fall off.
When will that happen? Some folks in the establishment suggest not for a very long time.
I think sooner.