Guest Post: The Cantillon Effect

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

The Cantillon Effect

Expansionary monetary policy constitutes a transfer of purchasing power away from those who hold old money to whoever gets new money. This is known as the Cantillon Effect, after 18th Century economist Richard Cantillon who first proposed it. In the immediate term, as more dollars are created, each one translates to a smaller slice of all goods and services produced.

How we measure this phenomenon and its size depends how we define money. This is illustrated below.

Here’s GDP expressed in terms of the monetary base:

Here’s GDP expressed in terms of M2:

And here’s GDP expressed in terms of total debt:

What is clear is that the dramatic expansion of the monetary base that we saw after 2008 is merely catching up with the more gradual growth of debt that took place in the 90s and 00s.

While it is my hunch that overblown credit bubbles are better liquidated than reflated (not least because the reflation of a corrupt and dysfunctional financial sector entails huge moral hazard), it is true the Fed’s efforts to inflate the money supply have so far prevented a default cascade. We should expect that such initiatives will continue, not least because Bernanke has a deep intellectual investment in reflationism.

This focus on reflationary money supply expansion was fully expected by those familiar with Ben Bernanke’s academic record. What I find more surprising, though, is the Fed’s focus on banks and financial institutions rather than the wider population.

It’s not just the banks that are struggling to deleverage. The overwhelming majority of nongovernment debt is held by households and nonfinancials:

The nonfinancial sectors need debt relief much, much more than the financial sector. Yet the Fed shoots off new money solely into the financial system, to Wall Street and the TBTF banks. It is the financial institutions that have gained the most from these transfers of purchasing power, building up huge hoards of excess reserves:

There is a way to counteract the Cantillon Effect, and expand the money supply without transferring purchasing power to the financial sector. This is to directly distribute the new money uniformly to individuals for the purpose of debt relief; those with debt have to use the new money to pay it down (thus reducing the debt load), those without debt are free to invest it or spend it as they like.

Steve Keen notes:

While we delever, investment by American corporations will be timid, and economic growth will be faltering at best. The stimulus imparted by government deficits will attenuate the downturn — and the much larger scale of government spending now than in the 1930s explains why this far greater deleveraging process has not led to as severe a Depression — but deficits alone will not be enough. If America is to avoid two “lost decades”, the level of private debt has to be reduced by deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.


In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a “Modern Debt Jubilee” should take the form of “Quantitative Easing for the Public”: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public — but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency.


Without a policy of this nature, America is destined to spend up to two decades learning the truth of Michael Hudson’s simple aphorism that “Debts that can’t be repaid, won’t be repaid”.

The Fed’s singular focus on the financial sector is perplexing and frustrating, not least because growth remains stagnant, unemployment remains elevated, industrial production remains weak and America’s financial sector remains a seething cesspit of corruption and moral hazard, where segregated accounts are routinely raided by corrupt CEOs, and where government-backstopped TBTF banks still routinely speculate with the taxpayers’ money.

The corrupt and overblown financial sector is the last sector that deserves a boost in purchasing power. It’s time this ended.

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francis_sawyer's picture

 Bono (during pause in concert ~ flapping fingers together): "Everytime I flap my fingers together like this ~ a child starves in Africa"

Irishman in Audience: "Well foogin stop doin' it then"!

NotApplicable's picture

I love that story.

Also, it's good to see Mr. Cantillon grace these pages. His observations have held up well over time.

As for the Modern Jubilee? Like they'll ever let that happen!

It isn't like debt slavery is an accidental occurrence.

Cognitive Dissonance's picture

"It isn't like debt slavery is an accidental occurrence."

Mrs. Cog likes to say......"It was on accident".

BigJim's picture

This Aziz fellow certainly is prolific... and worth reading, too.

But his surprise that financiers are mainly concerned with the wealth of... financiers... seems a tad naive.

Aziz's picture

Don't worry. I'm feigning surprise. Nothing will ever surprise me after this.

falak pema's picture

Don't age too fast, it ain't good for your arteries.

Keep in mind that all empires end and new ones rise.

It's tuff to be in the wrong place at the wrong time. The Oligarchs think that NY and London will be the places to be. I hope they don't kill their own comfy nests thru their infighting which will get ominous. Witness Standard Charters and ECB vs Merkel. 

The sheeple stay sheeple if they don't know how to become people and win their freedom back! 

EmileLargo's picture

Bono the tax dodger inventing new schemes daily to screw you with NEW taxes to feed the starving children of Africa. Why doesn't this hypocrite offload half of his considerable wealth before opening his fucking mouth?

Aziz's picture

Bono and his friends Bob Geldof, Bill Gates, George Soros, Alan Greenspan and George W. Bush are some of the biggest scammers around.

ncdirtdigger's picture

When that douche gives away all his money, and renounces all his future earnings over the poverty level, then maybe I'll give a chit about what he says. Meanwhile, I'll just pirate his music and chuckle.

MillionDollarBoner_'s picture

Where you went wrong.

You put "financial sector" and  "solvency" in the same sentence....

LawsofPhysics's picture

The answer to the question as to why Ben injected the new money into those TBTF banks and financial houses has to do with the true vlaue of the underlying collateral behind the "assets" on those balance sheets.  Just like Ben's Ph.D. the true value of those books and paper is closer to zero.

Moreover, those financial houses own your "representation".  Regulatory and representitive capture, period.  

A Nanny Moose's picture

But they are happy now. The new reformed Ben says Happiness counts.

WhyDoesItHurtWhen iPee's picture

Come the fuck on, fill my ears with honey.

LawsofPhysics's picture

Well said, how about simply marking all this shit to market and letting the chips fall where they may.  The world war never ended, as many are about to learn the hard way.

Cognitive Dissonance's picture

"Expansionary monetary policy constitutes a transfer of purchasing power away from those who hold old money to whoever gets new money."

Theft by any other name is still theft. Protect yourself.

bank guy in Brussels's picture

The populist solution above

« ... directly distribute the new money uniformly to individuals ... »

QE for everyone ... stop all those complaints about the banks because 'I got mine, too'

QE not only to infinity, but for infinite everyone

francis_sawyer's picture

I think that would be fucking hilarious... I'd buy a ticket to that ride...

Here's the scenario...


- Give every America $100,000 (or some pre-set ratio of aggragate National Debt, divided by population)

- Let 'em do whatever the hell they want with it... (pay off debt, buy guns, get a sweet ride, blow it on hookers, prep, WTFever)...

- Require them to report that amount on their tax returns the following year (same way as happens in debt restructuring deals or laterally, certain bankruptcy arrangements)

- Watch all hilarity ensue

francis_sawyer's picture

Yeah baby... Let the currency flow... (black market & whatnot)... Why not learn the lesson of the fallacy of 'central planning' firsthand?... Light the bonfire...


JohnKozac's picture

francis, $100,000 ?!  Are you kidding? I haven't even received my $3,000 from those cheap bast*rds. If someone else buys my Thinga----- beofrem y "free money" comes in, I'll be very sad.

francis_sawyer's picture

Of course I'm kidding...

I just like playing out the END GAME to every hypothesis... francis_sawyer is like a Rand Corporation, CFA, Bilderberg Group, Club of Rome, Trilateral Commision, UN, etc. all by my lonesome...

Except for all the ped.o.filia & blood sacrifices & all that shit that they need to do to get their dicks hard...

bnbdnb's picture

Never. Gonna. Happen.

The next twenty years of debt jubilees will occur in funerals.

qussl3's picture

Not student loans you wont.

WillyGroper's picture

You just hit the coffin nail in the head!

duo's picture

he stole my idea from a few weeks back.  Overnight, put an extra zero in all savings and cheking accounts.  The add two zeros to the monthly EBT (food stamp) payout.  Then watch the fun.

buzzsaw99's picture

The Cantillon effect only works if everyone keeps accepting joobux for goods and services. I suspect that won't always be the case.

bank guy in Brussels's picture

This John Aziz - Steve Keen idea of printing up QE money for everyone, reminds of what was proposed decades ago in

The famous President Jimmy Carter speech in the 1970s, 'Inflation is Our Friend':

President Jimmy Carter:

« Good evening. ... Our economic system is screwed, blued and tatooed! We just have to face the fact that there is simply no way to fight inflation ... That’s why, tonight, I want you to try to look for in inflation, an entirely new word: Inflation is our friend.

For example, consider this: ... If current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean – most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn’t you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would!

But what about people on fixed incomes? They have always been the true victims of inflation. That’s why I will present to Congress the 'Inflation Maintenance Program', whereby the U.S. Treasury will make up any inflation-caused losses to direct tax rebates to the public in cash.

Then you may say, "Won’t that cost a lot of money? Won’t that increase the deficit?" Sure it will! But so what? We’ll just print more money! We have the papers, we have the mints. I can just call up the Bureau of Engraving and say, "Hi! This is Jimmy. Roll out some of them twenties! Print up a couple thousand sheets of those Century Notes!" Sure, all these dollars will cause even more inflation, but who cares? Everyone will be a millionaire!

In my speech last week, I said that America would have to undergo an austerity program, but since this revolutionary new approach welcomes inflation, our economy will be free to grow, and we can spend, spend, spend! I believe the watchwords ... should be 'Let’s Party!' »

- President Jimmy Carter, as played by Dan Ackroyd on 'Saturday Night Live', episode 4, season 4

Aziz's picture

Point is, inflation is theft if someone is getting the money first (Cantillon Effect). It is not theft if everyone gets the same amount of money at the same time just to make the relative debt level smaller in comparison to income.

Anyway, I doubt the Fed will take Keen's idea seriously, mainly because the banks that contribute to the Fed system love getting the money first and having society's purchasing power transferred to them.

MachoMan's picture

How is it not theft to sacrifice future generations' economic chances or abilities?  To deplete resources now to ensure a harder struggle by others later?  To punish prudent savers in favor of imprudent financial prolifigacy?

The problem lies at the very foundation of the premise...  you can't nuance it to be moral...

MillionDollarBoner_'s picture

Yeah, well, its their fault they weren't born sooner.

Shit happenz!

BigJim's picture

  How is it not theft to sacrifice future generations' economic chances or abilities? 

That's the whole point of this type of jubilee.

EVERYONE gets a lump sum. Anyone in debt has to pay off their debts with it. Anyone not in debt gets to spend the money how they like.

As debts are paid off, the income streams to banks from interest will dry up and a lot of banks will go bust... which is what would happen if/when the size of the finance sector is reduced to its rightful size (ie, the size it would be if it provided only those services that a free market demanded)

Yes, it's inflationary, but at this point we can either have i) biflation as debtors go bust, banks get bailed out and wind up owning even more of reality than they do now, or ii) we shrink the portion of GDP that debt (and debt servicing) now occupies, and the economy moves on.

Ideally after such a jubilee, a free banking system will be implemented and Federal Reserve and its legal-tender fiat FRNs will be a thing of the past.

Hell, a man can dream, can't he?

MachoMan's picture

So...  let me get this straight.  Because the people/entities who behaved imprudently (and illegally in some instances) did so to such a large extent and/or confusing extent (securitization/derivatives), we are to simply print money, send it to debtors, who then are forced to pay back the imprudent lenders?  Really?  This is our master plan?

What the hell happened to sacking up and calling a spade a spade?  Why don't we liquidate the creditors, pull their charters, and ban improvident individuals from participating in the industry in the future if not sending anyone who performed an illegal act to the pokey?  Why don't we call this new fangled contraption the ponzi scheme it is and close up shop?

If one of the problems with the lack of formation of capital is that the present market/environment is inconsistent and risk averse participants cannot guess where it is headed, then how would a helicopter drop to the plebs help that consistency?  Why wouldn't we simply use a solution that already has a regulatory, legal, and market structure?  Why do we need to appeal to some convoluted inflationary scheme to "fix" things?

The other issue is that the jubilee presented isn't anything of the sort...  we're going to print $1.1m for every taxpayer?  Just hand it out tomorrow?  The author proposed far less...  amounting to a pimple on the ass of a debtor...  that isn't any jubilee, it's simply a direct cash infusion to prop up creditors...

Another issue is that just because you pay down debt, doesn't mean that your monthly payments decrease in the slightest...  e.g. a mortgage.  Most consumer stuff (credit cards, student loan debt, etc.) probably will, but I didn't see that specified in this proposal.

Bob Sacamano's picture

No way they will give the same amount to everyone (some are more equal than others) -- it does not fit the redistribution agenda.

Piranhanoia's picture

The jubilee wrapped in securitization.  The machines that wrote the law and forced their congressslave to vote for it began with extortion as the prime directive.  When the regulations were subsituted for RICO,  they had everything they needed to prevent the forgiveness of debt.   If anything better explains why seemingly rational beings are acting without conscience, this is the most reasonable explanation.   "We will blow everything up and we can prove you caused it",  signed,  your friend Jamie.

Darth Mul's picture

And after the Jubilee?

The money in the pocket of Worker, what remains, will be worth less, while large banks, spokes on the wheel emanating from the world's central banks...  will be made 'solvent' and thus, eager to extend credit to Worker's Deadbeat Alcoholic Nephew, who works for Goldman Sachs as an FC, placing bets against various CDOs Goldman sold to PensionFund.

The problem with hitting the reset button on a crap machine is you're going to have to keep on doing it.

Private central banks issuing and fractionally lending fiat currency, and the ownership thereof by a small minority, is per se flawed, per se unfair, and forgiving debt periodically merely extends the life of the system, and allows the theft of more and more real wealth/value by banks from workers.


No, my good man - you are still treating symptoms and overlooking disease.


In any event, odious debt, such as that held by banks creating money based on money that isn't even theirs... engenders no obligation of repayment.


The magick spell needed is to get several million people to stop paying their credit cards and school loans and to stop paying their taxes.


But no one's talking about that.  People are talking about horseshit.


Which is, of course, what those controlling central banks want.







shovelhead's picture

IRS SWAT Team arriving in 3...2...1...

XitSam's picture

The IRS has a SWAT team? That's just crazy talk!

buzzsaw99's picture

the pharisees never did like the joobilee

francis_sawyer's picture

You're on fire 2day buzz... lol

viahj's picture

yeah, he has both synapses firing in unison

XitSam's picture

What a dipshit article. First they are confusing wealth preservation with investing. Second, they say financial innovation isn't always bad since it gave us TIPS and if you don't trust government TIPS they can take anything you own anyway.  Well, the inflation in TIPS is controlled by the government so that argument fails. Further, people trusted Roosevelt in 1933 that the actions he took were necessary, trust is not the case in this day and age. Third, they say gold may be more or less expensive in the future so it is not a good investment. That's backwards, gold is the reference, it is the fiat currency that is changing in value. Fourth, go back to sleep sheeple and keep buying equities, let the central banks buy all that worthless "tradition".

Sorry for ranting, shit articles like this make me nuts.

Aziz's picture

Yglesias is a funny guy, but I don't think it's intentional.

XitSam's picture

I didn't even look to see who wrote it. That explains a lot.

JR's picture

The current ‘banner’ under which the financial elite have seized total control over the state, the budget and the economy has been ‘change’.

The Ascendancy of a Criminal Financial Elite

The Two Faces of a Police State: Sheltering Tax Evaders, Financial Swindlers and Money Launderers while Policing the Citizens

by Prof. James Petra | August 07, 2012

Never in the history of the United States have we witnessed crimes committed on the scale and scope of the present day by both private and state elites.

An economist of impeccable credentials, James Henry, former chief economist at the prestigious consulting firm McKinsey & Company, has researched and documented tax evasion. He found that the super-wealthy and their families have as much as $32 trillion (USD) of hidden assets in offshore tax havens, representing up to $280 billion in lost income tax revenue! This study excluded such non-financial assets as real estate, precious metals, jewels, yachts, race horses, luxury vehicles and so on. Of the $32 trillion in hidden assets, $23 trillion is held by the super-rich of North America and Europe .

A recent report by a United Nations Special Committee on Money Laundering found that US and European banks laundered over $300 billion a year, including $30 billion just from the Mexican drug cartels.

New reports on the multi-billion dollar financial swindles involving the major banks in the US and Europe are published each week. England ’s leading banks, including Barclay’s and a host of others, have been identified as having rigged the LIBOR, or inter-bank lending rate, for years in order to maximize profits. The Bank of New York, JP Morgan, HSBC, Wachovia and Citibank are among scores of banks, which have been charged with laundering drug money and other illicit funds according to investigations from the US Senate Banking Committees. Multi-national corporations receive federal bailout funds and tax exemptions and then, in violation of publicized agreements with the government, relocate plants and jobs in Asia and Mexico.

Major investment houses, like Goldman Sachs, have conned investors for years to invest in ‘garbage’ equities while the brokers pumped and dumped the worthless stocks. Jon Corzine, CEO of MF Global (as well as a former CEO of Goldman Sachs, former US Senator and Governor of New Jersey) claimed that he “cannot account” for $1.6 billion in lost client investors funds from the collapse of MF Global in 2011.

Despite the growth of an enormous police state apparatus, the proliferation of investigatory agencies, Congressional hearings and over 400,000 employees at the Department of Homeland Security, not a single banker has gone to jail

Read on to the conclusion:

MillionDollarBoner_'s picture

Jail is for the "little people " ;o)

El's picture

This is a moral hazard whether for banks or for the individual. Money given by the Fed or government isn't free and this idea is just another take on a redistribution of wealth. Once again we think punishing the savers and those who live within their means and rewarding those who don't is a good idea?

How about this...if you simply cannot pay your bills, go bankrupt and learn something from your mistakes (namely, living within your means). If you can pay them, stop whining about your debt problem and stop incurring more debt. It's just a thought...

pods's picture

That is a great line of thinking for an individual.

If society did that in numbers, this system would implode faster than it is now.

Our money supply needs to be expanded exponentially YoY.  

That simply is how the system works.

So if everyone were to live within their means, they would in effect destroy the system.

And that would make me happy.


JR's picture

Agree El, erasing mortgage and credit card debt for select borrowers is just more wealth redistribution with the same socialist results – the little Red Hen will refuse to voluntarily bake more bread that others can eat free at her expense unless forced to do so by government coercion.

Ron Paul has the answer. As he says:  “This is not rocket science, it is Economics 101. All it would take is for government to get out of the way.”

The man-who-should-be-president calls for a fundamental shift in our philosophy of government if we’re to avoid the economic cliff looming ahead.

“If we simply allowed markets to work free of governmental or Federal Reserve interference, bad dept would be liquidated relatively quickly and malinvestment would be curtailed. Scaled-back regulations would encourage businesses to expand. Lower taxes would jump start investment and spur job creation… There would be some short term pain, of course, but only by allowing the bubble to burst and bad debt to liquidate can we ever hope to begin building a real economy again.”

In short, steps that take us back to economic reality are the only way to “avoid having America become the next Greece.”