Money printing ‘robs’ working class, makes rich richer

 

 

You may have got a 7% pay cut this year.

Not literally, but with real inflation at around 7% (as I’ve argued in my first article in this series), you just might have.

And if this continues every year – as I believe it will, unless the current system is reformed – you will lose about half your wealth in 10 years.

The worst part is, it’s not your doing, or mine. We’re merely unassuming cogs in a large, unwieldy money printing machine that works for the benefit of those who control it – bankers, business moguls and decision-making politicians.

Core to this thesis is the Cantillon Effect – one of the most consequential, yet least understood concepts when it comes to the inner workings of the current financial system.

The Cantillon Effect – first described by famed French economist Richard Cantillon in 1755 – states that money printing impacts people unequally, with those closest to the money printer reaping higher profits to the detriment of those who are farthest away from it.

Due to this phenomenon, the inflation caused by money printing acts as a regressive tax on the population, with the poorest having to pay the highest prices for goods while the richest get it earlier for cheaper or invest in assets that maintain or increase their purchasing power. Additionally, it also favours investors over wage earners.

Legendary investor Stanley Druckenmiller puts it in even simpler terms: “The people who benefit from money printing are the rich people who know how to navigate the markets.”

Let’s look at the scenario below to see how this works.

Let’s say Bank Negara Malaysia (BNM) decides to lower interest rates, reduce the fractional reserve lending requirement or perform quantitative easing (politically correct term for money printing) – the three levers by which it can expand the money supply. At this point, banks will find themselves flush with new cash or cash that they would otherwise not have been able to use.

Looking to earn a profit on this money, they would likely jam it into the stock market or some other investment vehicle. Anticipating this, insiders who are beneficiaries of this crucial early information, and astute investors (who are likely high net worth individuals) would have already positioned themselves in the stock market. Unsurprisingly, this would cause the stock market to rally, benefiting those who get in early.

These publicly traded companies, whose stocks have been inflated, now find themselves with boatloads of cash (not to mention seeing the net worth of their largest shareholders balloon) and in a favourably low interest rate environment. This newfound liquidity and the promise of lower interest payments will encourage them to increase production and expand their business. Even companies that don’t trade on the stock exchange will jump at this opportunity to be able to take out large, low-interest rate loans to grow their business.

They’ll then use this borrowed money to buy up the technology tools, real estate and raw materials that will enable this expansion. When many large corporations start doing this, the supply of all these items starts dwindling, driving up their prices.

Remember, these corporations with more money will be chasing the same amount of goods and services, as money printing hasn’t increased real economic productivity. And of course, in a situation like the current one, where there are widespread and frequent supply chain disruptions, this price increase is only exacerbated.

Now other corporations, mostly medium and smaller businesses, will have to pay increasingly higher prices for these raw materials and tools which they need to make the end products that consumers use. But of course, they aren’t going to bear the cost burden alone.

They will inevitably pass it on to you and me who will now have to pay inflated prices for goods which use raw materials whose prices have been bid up by these larger companies. This then translates to reduced purchasing power and increased cost of living for us.

That, in a nutshell is what happens when the money supply is expanded. Since the new money enters the financial system through the banks, those at the top who are privy to early information and have the benefit of capital can invest their way to riches or buy goods for cheaper earlier. They can also take out loans at lower interest rates.

But those at the middle and bottom are forced to slog harder for longer in order to earn stagnant wages that don’t keep up with inflation.

And in the end, money printing does the opposite of what it rightfully should: it makes the rich richer and the poor poorer.

“The decrease in purchasing power incurred by holders of money due to inflation imparts gains to the issuers of money” — St. Louis Federal Reserve Bank, Review, Nov. 1975, P.22 - FMT

The writer can be contacted at kathirgugan@protonmail.com.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.