1. Historical Context
Richard Cantillon, an early 18th-century French-Irish banker and investor, observed in detail the effects of the influx of gold and silver from the American colonies on the economy of Europe.
2. The Breakdown Event
Cantillon postulated that new money injected into an economy is not distributed evenly or simultaneously among the entire population. Instead, the money first reaches the hands of the money issuers (the central bank and the government) and the country's large banks and financial institutions. These first recipients of liquidity spend the new money when the prices of daily consumption products and financial assets have not yet rise, benefiting from high real purchasing power. As new money flows through the economy and is distributed to the lower classes in the form of wages, the prices of goods have already rise, eroding the purchasing power of the last recipients.
3. Global Economic Impact
The Cantillon Effect scientifically describes how the expansionary monetary policy of modern central banks can systematically exacerbate wealth inequality and the rise in real estate and industrial assets in large economies.
Key Financial Lesson (Psychology of Money)
The devaluation of money through inflation acts as a silent and regressive tax. Whoever is closest to the channel of printing the new money obtains an unfair and direct benefit, while ordinary citizens assume the cost of the widespread loss of purchasing power.
4. Practical Case or Real Life Example
The sharp increase in global real estate prices after the massive injections of liquidity and bond purchases due to the 2020 pandemic classically reflected the Cantillon Effect: cheap capital flowed to funds and great fortunes before general inflation hit consumers.