Even if you know just a litte about how our economy works, you might wonder where all the printed money actually ends up. During the pandemic, we brought you articles about how governments are printing money to make up for losses, but where is the printed money actually going? Let’s take a look at that.
The Cantillon Effect
This situation was described by the Irish-French banker and philosopher, Richard Cantillon, already back in the 18th century. He described the principle of printing money based on the institutional composition of the state. In the 18th century, it was that the closer you were to the sovereign, the more you benefited from the new money. Which is true even now. Money goes primarily to the richest people.
Cantillon went on to describe his theory that a higher money supply will always mean a rise in prices, but it will be uneven and will depend on where the money goes first. In the parlance of today’s world, money gets to those who can exploit institutions first, these institutions (mostly banks) get to buy the interesting assets first, and this leads to the general population only getting their hands on these assets when the price is high and unattractive, or the currency depreciates, or both.
Could this be the principle of why we have seen such growth in real estate and equities in recent years?
Another negative influence of printed money
Cantillon described another negative influence. Newly printed money mainly benefits rich people who will continue to increase their spending and this will lead to a general rise in prices and wages. Although the rise in wages will cover part of the costs, it will also lead to the need to import cheaper products from abroad. This may gradually lead to the complete destruction of a functioning industry and the country will become dependent on foreign imports.
The theory described above is interesting, and although Cantillon described his theory with reference to the gold mines, it is very easily transferable to today’s money printing. So if your pick was real estate and stocks, you are probably very close to the reality of where the printed money ends up.