How Cantillon Effect Works In 5 Steps (Top 2024 Dangers)

The Cantillon effect is inflation resulting from a change in the circulating money supply usually due to government quantitative easing policy.

Simple Terms: The government prints money to stimulate the economy, this leads to a spike in prices for all common goods, which leads to inflation and growth of national debt.

Here are the 5 steps of how this happens as well as how Bitcoin can help with this problem:

• Step 1: Government Quantitative Easing Policy

• Step 2: Government Debt Grows

• Step 3: Fed Keeps Printing Money To “Boost Economy”

• Step 4: Low Interest Rates Boost Economic Activity

• Step 5: Prices Increase for Ordinary People — Inflation

• Top 4 Dangers of Cantillon Effect

• Top 3 Signs of Inflation for 2024

• Remedy for Cantillon Effect —  Saving in Bitcoin 

• Final Thoughts

It all starts with government spending, where newly printed money by central banks embarks on an intriguing journey into the economic system through two primary policies (you may have heard of before):  

• Government deficit spending 

• Quantitative easing

Quick break to explain how these work…

What is government deficit spending? 

Every government runs into something called a fiscal deficit when it spends more than it takes in from taxes and other revenues. Any type of increase in the fiscal deficit does two things: 

1. It can boost a sluggish economy by giving individuals more money to buy and invest more in the market.

2. It also created long-term deficits that are detrimental to economic growth and stability.

What is quantitative easing? 

Quantitative easing is a monetary policy strategy central banks use in most countries (in the U.S., it’s the Federal Reserve). 

When running a quantitative easing policy, the central bank purchases long-term government bonds or mortgage-backed securities from that nation’s largest banks in an attempt to:

• Reduce interest rates 

• Increase the supply of money, monetary debasement

• Drive more lending to consumers and businesses

The biggest problem and danger of quantitative easing is the risk of inflation. When a central bank floods the economy with money by printing it, the supply of dollars increases, which causes inflation.

When the government spends the money, it does so by borrowing and running a higher deficit. Instead of raising taxes to drive more revenue to spend on quantitative easing or deficit spending, the government borrows the money. 

In the U.S., for example, the government is currently running a debt of $33 trillion and the number keeps getting bigger and bigger.  

Ordinary U.S. citizens are unaware or seemingly indifferent, as the immediate consequences don’t ripple across the population. Why care if the government has a high debt? How does that really impact you and me, after all? 

To lower interest rates or bail out financial tumults, the Fed performs a kind of financial alchemy — it prints money and acquires more bonds. As bond prices grow, interest rates and yields gracefully come down. Low-interest rates mean more businesses and people can borrow money.

This quantitative easing policy fills the pockets of Wall Street banks with crisp, fresh cash, eagerly awaiting investment.

With interest rates at an all-time low, the wealthy elite and businesses seize the opportunity, leveraging their resources to expand operations or acquire appreciating assets.

More and more dollars start circulating as more businesses borrow money and invest. This is the secret sauce that kept the stock market soaring even after the tumultuous crash of 2020.

But hold on! As these new dollars circulate through the economy, they silently nudge the prices of life’s essentials.

This is the point when the double-edged sword of inflation makes its entrance.

Average folks find themselves priced out of any asset ownership game (buying a home, buying a car), while inflation’s relentless surge makes investing an uphill battle. Ordinary people simply cannot afford the increasing prices. All of a sudden, you find yourself paying $8 for a dozen eggs at a supermarket.

The result? A society grappling with resentment, trying to find solutions to bridge the wealth gap.

You typically hear a lot of talk about increased government intervention.

But remember, the government has two central policies, both involving spending. So, more intervention by the government means more deficit spending. Relentless money printing continues to fan the flames of instability.

This is essentially how the Cantillon Effect works.

As the wealth gap widens under decades of high inflation, the Cantillon Effect is more palpable today than at any time in recent history. There are four main consequences and dangers of quantitative easing and deficit spending:

#1 Gen Z & Millennials Struggle: As asset prices, like homes, soar to new heights, younger generations grapple with the mounting challenge of saving and investing. Many turn to social media, openly sharing their need to move back in with their parents due to the unattainable dream of homeownership.

#2 Diluted Purchasing Power For Everyone: Every freshly printed dollar dilutes the value of money, leaving individuals with shrinking purchasing power. This phenomenon unfolds as investment markets skyrocket, making assets less accessible.

#3 Inflation’s Double-Edged Blade: The constant infusion of new money gradually elevates the costs of life’s essentials, leading to consumer price inflation. This double-edged sword hampers the average person’s ability to acquire assets and presents investment hurdles.

#4 Demoralized Society: These financial challenges have cast a shadow over society, leaving it in a state of demoralization and discontent. Calls for greater government control to address perceived inequalities echo through the air.

Since Consumer Price Inflation (CPI) is frequently adjusted, it may not be the best indicator for catching on to inflation before it’s too late. While that data can sometimes lie, these three measures can serve as early warnings for higher future inflation. 

#1 Liquidity: Liquidity measures like the M2 money supply are often cited as valuable leading indicators for inflation. As the Fed injected historic amounts of money into the system throughout 2020 and 2021, asset prices soared, followed by CPI increases.  

#2 Interest Rates: As the Fed starts a new round of quantitative easing, they do so by purchasing bonds to drive down interest rates. Keep an eye on the bond market; significant moves in bond yields could indicate the Federal Reserve is back to printing again. 

#3 Oil Prices: The price of energy affects just about everything. If oil prices increase for a protracted amount of time, it’s prudent to expect manufacturers and logisticians to raise their prices to remain profitable. Pain at the pump is also to be expected. 

Addicted to New Money: The system is currently leveraged to the hilt. U.S. total debt stands at $33 trillion, growing larger every day. The fact is that without this money printing, the system would collapse spectacularly.

Debt Spiral, Spirals: Debt begets more debt, and with debt levels this high, the Federal Reserve is only one small emergency away from another round of quantitative easing, starting the entire Cantillon process over again. 

Opt-Out with Bitcoin: Bitcoin is an escape from the vicious cycles of money printing that will always have you scrambling to catch up. In a world devoid of scarcity in the monetary system, scarce assets like Bitcoin will allow your savings to outpace the rate of monetary inflation. 

NGU Technology: As the money supply increases exponentially, so will asset prices. Bitcoin may be the younger generations’ only hope to achieve a secure financial future as they produce the next generation, especially with Bitcoin’s increasingly popular scarcity. 

As the money printer begins again, remember that the inflationary Effects will not be distributed evenly. It all depends on where the money enters the system. 

With the next round of Quantitative Easing, new money enters the system through Wall Street. Bitcoin is growing into a sponge for this excess liquidity. Much of this excess liquidity may flow from things like bonds into Bitcoin investment tools, i.e., Bitcoin IRAs or a spot-Bitcoin ETF.  

In a world devoid of monetary scarcity, Bitcoin’s limited supply will allow you to leverage the Cantillon Effect to your benefit. It may ultimately be the younger generations' last best hope at a financially secure future.