Austrian economists say that if you magic a bunch of money into existence, the price of stuff tends to go up – you’ve added to the supply of money, and when people get more money, they use it to buy stuff that they couldn’t have bought otherwise. This increases the prices of whatever they buy.

Inflation of the money supply causing price inflation.

Now, we all know it’s a lot more complex than that, but it’s a useful example that helps us think about what Richard Cantillon said.

He said that which prices inflate first depends on who gets the new money earliest.

So if we print a billion dollars and hand it to rich people, the price of pasties won’t change much initially – the price of steak goes up first.

And if we print a billion dollars and hand it to poor people, the price of steak won’t change much initially – the price of pasties will go up first.

It’s a simple idea – pour more money into Rich World and more rich people will buy more steak, driving up the price of steak. Pour more money into Poor World and more poor people will buy more pasties, driving up the price of pasties.

So far, so good.

Back in 2008, the central bankers started printing lots of lovely money, in the hope they could boost our economies by increasing aggregate demand. Austrian economists like Robert Murphy (important not to confuse with Richard Murphy, pompous self-anointed midwife of Corbynomics) said it would cause price inflation in things bought by rich people, or poor people, depending on who you gave the money to first.

Then we gave all the lovely new money to rich people. And they decided to invest it.

The S&P 500 (for example) has risen quite a lot since 2009 – from 750 to 2750 or so.

According to Brian Barnier, principal at ValueBridge Advisors, the Fed has been responsible for almost all the U.S equity market appreciation, from when they started loosening in 2009, to when they started tightening in December 2015.

So that’s “steak” – the stuff that people buy in Rich World.

What about the price of “pasties”, in Poor World?

Tick tock tick tock.

Subscribe to The CT Mailer!

3
Leave a Reply

Please Login to comment
3 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
3 Comment authors
SouthernerBloke in North DorsetSpike Recent comment authors

This site uses Akismet to reduce spam. Learn how your comment data is processed.

  Subscribe  
newest oldest most voted
Notify of
Spike
Member

No, compare luxury cars to mac & cheese. Putting that excess cash into stocks is a whole ‘nother thing, though it has in common that only the rich can do it. Obama continued the 2008 debacle, through forcing interest rates to 0% through having magic money for whomever needed it. Ironically, it was a heyday for stock investing. The Dow was sturdy despite a socialist President, worst-in-the-industrial-world corporate tax rates, and one-third of the American workforce sitting on the sidelines. Common stock was the economy’s spleen, sinking unusable capital to disgorge it later when needed. There is still a huge… Read more »

Bloke in North Dorset
Member

It’s also how despots like Mugabe and Chavez get their mates rich. print the money and give it to your cronies and let them switch it to inflation proof valuables like diamonds before the local currency gets chance to be devalued.

Southerner
Member

The natural home of money is the markets. QE went straight into housing and stocks. Not that I’m complaining as it more than trebled the size of my retirement nest egg.