Countering the Cantillon Effect

18th century economist Richard Cantillon theorised that new money added to the economy always reaches the wealthiest people first. If there’s a lot of it, the extra supply will push up prices, but the rich won’t feel it, they’ll just create it. The impact down the track is that the poor, surviving with the same money as before, get hit with the higher prices.

Phil suggests that wouldn’t be the case if extra money was created through government spending. It would be the workers and those on welfare getting the first touch of the new money. But, as Steve explains, most money created through government deficits is counteracted by the private sector buying up the government’s bonds. Most of the new money is created through private debt - bank loans, for example. So Cantillon was right.

The way to fix the problem s to put in place policies that would see more of a balance between public and private sector money creation.

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