Hacker News Reader

Comment by logicchains | Hacker News Reader

Current monetary policy is literally a massive transfer of purchasing power from currency holders (poor and middle-class people who keep their savings in cash or low-interest bank accounts) to the first people to spend the money, which is the people and institutions working in the financial system. If I counterfeit a billion dollars and go out and spend it all, I've got more stuff and everyone else is a little bit poorer. If the central bank prints a bunch of money and lends it to its buddies in the finance industry for near-zero interest rates, they get more stuff and everyone else gets a little poorer.

Now this argument wouldn't apply if it was possible for the average person to borrow money directly from the central bank at the same near-zero interest rate the banks pay, but that isn't the case.

View on HN

I believe there’s a name for what you’re describing: the Cantillon Effect.

> An 18th century French banker and philosopher named Richard Cantillon noticed an early version of this phenomenon in a book he wrote called ‘An Essay on Economic Theory.’ His basic theory was that who benefits when the state prints a bunch of money is based on the institutional setup of that state. In the 18th century, 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. Money, in other words, is not neutral. This general observation, that money printing has distributional consequences that operate through the price system, is known as the “Cantillon Effect.” [1]

1: https://mattstoller.substack.com/p/the-cantillon-effect-why-...

> Now this argument wouldn't apply if it was possible for the average person to borrow money directly from the central bank at the same near-zero interest rate the banks pay, but that isn't the case.

Any time you take out a mortgage (at well below inflation by the way) you are obtaining new money "from the printer." The same is true any time you take out a loan.

This whole cantillon effect business is trotted out and flogged each time we mention economics on here but as far as I can tell, nobody has ever even attempted to quantify the impact of the cantillon effect.

> If I counterfeit a billion dollars and go out and spend it all, I've got more stuff and everyone else is a little bit poorer. If the central bank prints a bunch of money and lends it to its buddies in the finance industry for near-zero interest rates, they get more stuff and everyone else gets a little poorer.

This isn't actually true. Japan tripled its M2 money supply since 1990 but both CPI and housing CPI remain dead-ass flat. This model is way too simplistic. Which is why it was thrown out alongside the rest of Austrian economics.

Things that seem intuitive aren't always right.

The poor and middle class aren't currency holders, they are debtors. Their savings are dollar denominated, but so are their debts, and their debts exceed savings.

This is an incredibly basic, fundamental fact, and your omission of it in your analysis is telling.

The poor and middle class cannot take out as large a debt at as low a rate as those closer to the money supply.

Debt at 3% against an asset will on average net 4% return just due to 7% inflation

So massively leveraging against a home is extremely beneficial as it is the closest the poor and middle class can get to taking advantage of our monetary system.

So, it's not about the poor being debtors or holding currency, but that their debt is at higher rates, in smaller amounts, and typically acquired for everyday needs instead of assets.

That is true regardless of where interest rates are, or whether inflation is happening, and thus, irrelevant to the initial nonsense claim of 'the poor and middle class are hurt by inflation because they mostly hold cash (never mind their debts...)'.

I mean, I'm willing to entertain the possibility that they are, but despite that claim's popularity in these threads, that claim can't be the reason for it.

> That is true regardless of where interest rates are, or whether inflation is happening

If there was no inflation, there would be no inherent profit from taking out a large loan.

From my comment above the math is 7% inflation minus 3% interest rate equals 4% profit just from taking the loan.

That's the problem.

It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt.

Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation.

Thus the looser the monetary policy, the greater the incentive to take out debt, the less the poor and middle class have access to debt.

Further, this all compounds into inflated asset prices for basic needs like housing.

> If there was no inflation, there would be no inherent profit from taking out a large loan.

Only if you are a spherical cow that intends to live forever.

Most people value money now more than money later. Money now lets you buy things you need, today. If you expect your earning power to increase (which happens for most people without inflation to one respect or another), but you need the asset today (a car to get to work, a house to live in), you'd still want to borrow money.

> It's not just that the poor can't start a business or buy an asset, it's that debt itself is incentivized, and those that are wealthy get the best access to that debt.

Yes, that's one major driving factor for inequality.

> Our current monetary system then exacerbates that as the lower the interest rate, the higher the inflation.

Okay, that's a far more persuasive argument than 'Bob's $500 savings account lost 2% of its value this year.' And it does hold true for asset inflation, as asset prices take a few years to normalize to, say, a P/E ~inversely proportional to the prime interest rate.

But once they do normalize, why do you expect asset price inflation to continue?

> you'd still want to borrow money.

For sure, but you'd be met with market rates that tame your desire for money now. Buying a car on credit is a lot less tempting at 20% interest than 4%. Right now used car prices are going up and it's easy to get low interest financing.

Used cars are not supposed to go up in value. It's madness.

> But once they do normalize, why do you expect asset price inflation to continue?

I expect asset prices to continue to inflate as long as we continue with our current monetary policies.

I expect us to continue with our current monetary polices because the US would be unable to service its debts in about decade otherwise.

> Used cars are not supposed to go up in value.

That's due to a demand spike and supply shortage. Blame bitcoin and video games and people not wanting to take public transit in the middle of a global pandemic. It's not because of monetary policy, or because Scrooge McDuck borrowed a trillion dollars for free to buy up a bunch of used cars, or because GOOGL doubled in value in two years.

> I expect asset prices to continue to inflate as long as we continue with our current monetary policies.

Why? If it didn't make sense to invest money at a P/E ratio of X at a Y%-for-you interest rate, why would you invest money at a P/E ratio worse than ~2X, at a Y/2%-for-you interest rate?

I get that the process of going from X to ~2X is painful, but why wouldn't it stop there?

Reply on news.ycombinator.com