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I hope everyone had a great Thanksgiving Holiday! I was fortunate enough to get the spend the Thanksgiving Holidays with my parents along with my family members. I am very excited about this weeks newsletter, and I think it is one of the most interesting topics that we have discussed to date. The Cantillon Effect is the most important economic concept that you have never heard of.
I am a big advocate that money printing is a horrible form of monetary policy that Washington DC has used over the past 35 years. In the past, we had such a strong middle class in this great country. However, the data is showing that the strong middle class is quickly declining.
The middle class once represented the largest share of people who earned income. However, the upper class is quickly becoming the largest share and taking over the lower/middle class. According to research from the Federal Reserve, the top 10% of the richest families own 70% of our nations wealth.
In Matt Allen terms, you and 3 of your cousins decide to eat a Thanksgiving pie. You guys would divide this pie up so each person gets 25% of the pie. Well imagine, one cousin getting 75% of the pecan pie while you and your two other cousins fight over the other 25% of the pecan pie. The one cousin getting 75% of the pecan pie is the upper class while you and your cousins are the middle/lower class.
Politicians and Wall Street are the ones that have created this crisis in the first place. Money printing is the leading cause of this great income inequality gap and something known as the Cantillon Effect which means that the people closest to the money printer benefit the most from the money printing.
Richard Cantillon was a French Banker and philosopher in the 1700’s. He noticed this phenomenon and wrote a book about it called ‘An Essay on Economic Theory.’ His basic theory was that who benefits when the state prints a bunch of money is based on how the states setup their institutions. If you lived in the 1700’s, this meant that the closer you were to the king and the wealthy, the more you benefitted, and the further away you were, the more you were harmed.
Gold was the main currency of money during Richard Cantillon’s time, and he wrote about when a nation-state discovered a gold mine in their territory. When you find a Gold Mine, what happens? The supply of gold obviously goes up. He realized that increasing the supply of gold did not increase the price of gold nor did it help the people who didn’t have gold. As he put it, “doubling the quantity of money in a state, the prices of products and merchandise are not always doubled. The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled.”
Cantillon realized that when the supply of gold became higher that the people closes to the King (Money Printer) and the Rich would spend it on 1700’s “luxuries” like servants and meat pies. This would increase the price of everyday items (inflation.) The working people of the 1700’s (middle class) would have to pay higher prices without access to the new gold.
When the Government/Federal Reserve prints money, it actually doesn’t print the money. They give banks digital dollars that just magically appear in their bank accounts. (Imagine The Fed Reserve Venmos you $1 Billon of Monopoly money but you can use it like real money)
Once the banks have this new money in their account, the banks lend this money to the upper class via investment funds, corporations, and wealthy individuals.
Since 2020, the Federal Reserve has printed this money at a record rates due to the covid-pandemic. Guess how corporations and wealthy individuals used this money? They bought back their own company stock, went on large real-estate buying sprees along with some of the biggest bonuses in the history of modern finance.
Along with the money printing, the Federal Reserve has lowered interest rates so much that these corporations and wealthy individuals were allowed to borrow this money on loans for basically free.
Due to the Cantillon Effect, the lower and middle class have seen record prices in the stock market, real estate market, and multiple other asset classes because the upper class have literally had BILLIONS to blow.
For example, Blackrock went on the record and said they are going to buy as much real estate as possible, pay the highest price, and charge very high rent. Guess where? In OUR neighborhoods. What did this do? It exploded the real estate markets and has made real estate unaffordable to the lower and middle class.
How did they get the money? They were a company that received some of the largest “free” money during the covid pandemic.
You still might be asking, how does this affect me?
The Cantillon Effect states that anytime the supply of money gets larger that your buying power becomes weaker. For example, the price of gas has soared while your dollar has lost 6%. In theory, your gas bill costs 6% more each time than the pump actually says.
The worst part? The middle class are the largest class that saves their money while the rich invests their money.
It is more important than ever to invest your money into stocks or bitcoin. These are my two favorite asset classes that compete with the rising inflation rates. This is the only solution. This is not a political issue. It is an issue of being smart with your money.
This has been a brief and simple explanation of a complex theory. I hope it helped you grasp this theory a little better.
I appreciate everyone who reads the newsletter, and please help me spread the word!
Stay Hungry, Stay Long