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Comment by logicchains | Hacker News Reader

Fun fact: the Cantillon effect, whereby the first recipients of newly created money (banks and financial institutions) gain at the expense of the later recipients due to being able to spend it first before it causes much inflation, can by itself produce a highly unequal distribution of wealth. So even if everything else in society was perfect, the current central banking system would still lead to an uneven distribution of wealth.

This would be remedied if newly created money was credited directly to people's accounts rather than given to banks to lend out.

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>whereby the first recipients of newly created money (banks and financial institutions)

This is commonly misunderstood. Central banks create interbank money that cannot be spent outside the financial system. The banks themselves create the new money by issuing loans. However, they issue these loans to the already rich, thereby exacerbating existing inequality.

There's a crucial distinction here to make, you are naming the correct effect, and it has the correct effect, but it happens somewhere different, so your proposed solutions would be adverse.

> There's a crucial distinction here to make, you are naming the correct effect, and it has the correct effect, but it happens somewhere different, so your proposed solutions would be adverse.

Can you spell out the adverse effects you see in the proposal to credit money directly to people's accounts? It seems like the money people spend would go to paying directly for consumables and to paying off loans and the money they don't spend would stay in the banking system, helping to meet capital requirements and supporting the banks' loans to the rich (and others.) It seems like the above situation might create inflation in consumables but it wouldn't create asset price inflation. And since the money is going directly to those most affected by inflation in consumables, there's a different but reasonable balance achieved. So, I can see that you see something I don't see. Can you give some examples?

Bank loans (the money creation) largely flow to those with good credit - i.e. the upper and middle classes. They can use the extra credit to buy more assets like houses, or even take personal loans to 'yolo' into crypto to $TSLA.

The exceptional, pandemic-related stimulus money may have done something similar, but now I'm speculating. Of course, giving more money to people when consumables are inflating due to scarcity from a supply shock will only make the inflation worse, won't it? No matter whether you give money to wealthy people or everyone.

> They can use the extra credit to buy more assets like houses, or even take personal loans to 'yolo' into crypto to $TSLA.

I'd agree that this is the case and argue that it is what has been happening since the aftermath of the ~2008 GFC. I'd further argue that this is one of the chief drivers of inequality as it drives up the price of housing for everyone without driving up everyone's ability to pay for housing by the same degree. To my eye, that is an adverse consequence. That it also drives up stock prices is mainly of interest to the relative few in the economy who own stocks. That an increasing share of flat-ish income is spent on housing rather than on, e.g., food, is an adverse effect of the strategy.

You're moving the goalposts to raise supply shock scarcity rather than something inherent to money for everyone rather than money for the already monied. I do agree that supply shocks are probably a factor these days. That said, there's only so much a given population is able to consume and making sure that they all have an equal chance at it seems more pertinent to maintaining stability than increasing the price of assets, where there is no inherent limit.

I'd really like to understand this process. Is there a real world example of government employee adjusts a particular figure on a particular bit of software. That then somehow sends money to a particular bank?

1. Interest on reserves increases the rate of growth of commercial bank reserve balances held at the Fed: https://fred.stlouisfed.org/series/IORB

2. How Do Primary Dealers Make Money? Primary dealers buy bonds directly from the government and then resell them to clients and investors at a slight mark-up. This small difference in price is how primary dealers earn a profit. https://www.investopedia.com/terms/p/primarydealer.asp

Thanks

Bank of England details the process of money creation: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Recommend picking up a copy of Central Banking 101[1] for a gentle introduction; the basic mechanics of fractional reserve banking are explained in Chapter 2.

[1] https://www.amazon.com/Central-Banking-101-Joseph-Wang/dp/09...

This isn't even wrong. Newly created money isn't given to recipients. It's either borrowed by financial institutions, who must repay it with interest, or used to purchase government and agency bonds from private holders in the open market.

When a financial institution borrows from a central bank, the financial institution records an increase in financial obligations (a credit to Liabilities), along with a corresponding increase in cash & equivalents (a credit to Assets). All of this is in the bank's balance sheet, easily verifiable (e.g., by reading annual reports).

What you're suggesting (somehow getting central banks to lend newly created money to individuals even if they don't ask for it) makes no sense.

But it’s banks that create money, by crediting it to peoples’ accounts. When you get a loan from the bank they create the money by crediting your account.

It doesn't have to be that way. People could have accounts with the central bank and it could credit their accounts directly, and the banking regulator could mandate 100% reserve requirements so that banks themselves couldn't create more money.

Unless there's a limit on how much can be put into the central bank account this would have an extremely severe impact during a financial crisis.

The central bank account would be safer than government bonds, meaning in a flight to safety interest rates on government debt would rise as money drained to the safer central bank account. Exactly the opposite of what you want when you may need government to act urgently and expansively to solve whatever problem has occurred and likely only the elected government has the authority to solve that problem.

The central bank would have very low interest rates for deposits. It's not even a farfetched idea. Central bank digital currency is exactly this concept implemented in a general way

Interest rates have no bearing on the issue I raised. During a financial crisis (2008) people don't care about interest rates they care about the safety of their capital.

Source:

https://web.archive.org/web/20141028071303/http://www.bankof...

Work creates money. Not banks.

Work creates value, banks create money to represent the value. Money isn't value, it's a (n occasionally wrong) map of it.

Well said. It's a distorted representation of value. The monetary system is not an even playing field, some people earn more money than others whilst providing less value; even negative value. Those who spend other people's money right out of a money printer don't hold onto it anywhere near as tightly as those who had to work hard to earn it from other people whom themselves also worked hard.

I think this is a confusing/misleading way to frame it.

Instead of saying: > some people earn more money than others whilst providing less value; even negative value

It's more precise to say: > some entities (people, companies, ...) give money to some people whilst those people provide less value than others

This turns the passive language (receiving) into active language (giving) which requires a subject. Now immediately a question appears: why would the subject do that if they receive comparably little value?

In other words, this doesn't really have to do much with the monetary system at all. The same would be true without any money.

The difference is that if somebody or an institution earned their money fair and square, then they are entitled to give it to anyone they want. The problem is that the monetary system itself creates the inequality via artificial means (which falls on the shoulders of taxpayers and citizens via inflation) which means that big institutions did not earn much of the money that they're giving out; it was handed out to them through money printing. It's a systemic issue.

Just to be clear, I'm not disagreeing with the point you are making now, but it's clearly different from your original post which was all about "creating value".

And some work creates negative value! :)

If environmental costs are included, it might be more than “some”, such is the structure of the economy.

Even without externalities there is plenty of work that isa net negative in the macroeconomic sense.

If I pay someone to espouse the glories of ignorance, sow division and shill terrible policy online (not that many among us don't do it for free regardless) that work is of negative value to the broader economy despite having scant if any externality. But, that work is of positive value in the microeconomic sense hence why someone would get paid to do it. There are lots of niches like this in the economy.

See related: Broken windows fallacy and bullshit jobs.

If you add to this that the value of "money" is backed by violence and you see that without energy to back that violence there can be no markets; then you will be able to imagine where this is heading at very fast velocity!

Nature does not negotiate.

  - Own you time! Don't sell your time.
  - Sell your past, not your present/future.
  - Only work with software. Hardware is done permanently.
  - Lower the energy requirements until it hurts.
  - Make permanent solutions.
  - Stop moving faster than 20 km/h, if you do take a train.
  - Live small, so you can heat it for less.
  - If you are in debt: SELL!

You exchange work for money.

Indeed.

And it's clear through this lens that if the Fed's goal was actually to have a stable currency, they would grow the money supply through this method. Under a helicopter money scenario, the intended inflation/counter-deflation would happen nearly instantly, they could get the exact amount required, and we would move on with our lives.

Right now we have lagging indicators for lagging indicators that are lagged through the Cantillion effect. Of course it's an absolute impossibility to get it correct! No wonder we get booms and busts!

Deflation is bad, it causes rent-seeking through hoarding money. But inflation is bad, it causes rent-seeking through hoarding assets. The goal needs to be against rent-seeking, against zero sum behavior. The only way to accomplish that is steady prices.

How is the cantillon effect supposed to cause an exponentially and constantly increasing inequality? If I take you at your word inequality would be constant and never increase.

Also, proponents of the cantillon effect forget that people with money can do an inverse cantillon effect by withholding their money from the markets and then they can do a regular cantillon effect by putting their money on the market.

If we assume a positive return on capital aka a positive interest rate then inequality would rise simply because the wealthy have most of their consumption needs fulfilled already and then in the late stages of capitalism they would be the ones manipulating the cantillon effect because they act as a quasi central bank.

Right. Or, banks should bid for receiving newly created money (i.e. bidding for giving out new credits).

There are two competing hypotheses: (a) deposits/savings create loans; (b) loans create deposits. (a) is false. Private banks create more money than central banks through loans, so your solution won't work for that side.

What you suggest isn't possible though because it's the act of banks lending that creates the money to begin with.

The Cantillon effect is a desirable result in theory because it can greatly increases the viscosity of the resultant inflation. This gives the economy time to adapt to the change in prices. Depositing newly created money directly into people’s accounts has the same base problem as the current situation — it is misallocated with respect to the need for expanding currency supply — but has the added problem that inflating the currency this way has very low viscosity, which is undesirable. Very liquid inflation is correlated with poor outcomes historically.

Any practical allocation of new currency is going to be a misallocation, including a helicopter drop. The challenge governments have is inflating currency in a way such that it takes as long as possible to be fully reflected in the economy so that it is minimally disruptive. This turns out to be very tricky, precisely because it is virtually guaranteed to be a misallocation.

>The Cantillon effect is a desirable result in theory because it can greatly increases the viscosity of the resultant inflation

Whether it's desirable in theory depends on what the end goal is. If the end goal is less wealth inequality, a less efficient but more fair system might be more desirable than a more efficient one that systematically transfers wealth from currency holders to financial institutions.

Inequality is actually highly inefficient because inequality allocates production away from the poor who have human basic needs and toward the rich who basically only have superfluous consumption left. You can't argue that these rich people invest in better things than feeding children or educating them.

Wouldn't investment in automation solve that?

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