Wealth Caused By Inflation: The Cantillion Effect


What do a Bacon triptych, a balloon dog, a Pink Star and the stock market have in common? They’re very, very expensive.

New York art auction house Christie’s raked it in on Tuesday. It held a postwar and contemporary art auction. First Francis Bacon’s 1969 three panelled painting (a triptych) of Lucian Freud was put up. Valued at ‘just’ US$85 million, a six minute bidding war took it to US$142.4 million. That’s a record sale. It’s now the most expensive piece of art ever sold.

Then Jeff Koon’s sculpture of a very cute looking balloon dog took out the all-time record for a piece by a living artist. At US$58 million, it was almost double the previous record.

Down the road, Sotheby’s announced that a 59.60 carat pink diamond called the Pink Star set a record for any gemstone at auction. At $83 million, it’s also close to double the previous record sale. Although it’s also twice the size of the Graff Pink. Sotheby’s played Henry Manchini’s Pink Panther soundtrack after the bidding ended.

Three record sales for inanimate objects, and the Dow Jones index hit a record high too. What’s going on?

The answer is theft and fraud. Theft and fraud on a grand scale. So grand that nobody notices it.

The famous anti-Semite Lord Maynard Keynes explained just how the stealing works: ‘…the operative reality of the creation of fiat funny-money is that those who get the new money first are stealing purchasing power from those holding the existing money without the victims knowing what hit them.

The economist Richard Cantillion, supposedly the founder of political economics, had all this figured out hundreds of years ago. Today we call the redistribution of wealth caused by inflation the Cantillion Effect. And part of Cantillion’s theories are that asset prices rise if you print money, leaving asset owners wealthier than those who don’t own much.

Of course, what’s really happening is that money becomes worth less if there’s more of it. So if you own real stuff, you get comparatively richer than those who hold cash, or whose wealth is primarily in wages or fixed income. That’s why inflation benefits the art, diamond and share owning rich. And it does so at the expense of those of us who think bacon is food and balloon dogs are made out of balloons.

aBut who is the thief? Who is creating this new money and causing inflation? Let’s call in the expert on theft and pink diamonds, Inspector Clouseau, for advice: ‘Facts, Hercule, facts! Nothing matters but the facts. 

The facts are that yesterday Federal Reserve Committee member Richard Fisher said the Fed’s balance sheet was ‘bloated‘ and QE ‘cannot go on forever.‘The ASX promptly got ‘shot in the dark’, falling 1.4%. Fact!

But for now, central bankers are still printing money like madmen. And the money printer in chief, Ben Bernanke, will soon be replaced by madwoman Janet Yellen, who is even more of a money printer. Fact!

Tomorrow, Yellen goes in for questioning by the American senate to uncover her counterfeiting tendencies. But she’s already released her prepared remarks. She will explain that the Federal Reserve ‘has more work to do.

bAnd while money printing continues, asset prices keep surging. Royal Bank of Scotland explains that the Federal Reserve ‘is now responsible for monetizing a record 70% of all net supply measured in 10y equivalents. This represents a reliance on the Fed that is greater than ever before in history!‘ Fact!

The same criminal gang is operating here in Australia too. An interesting local character who Inspector Clouseau would bring in for questioning is the Australian Financial Review‘sDavid Bassanese. Witnesses claim his headline in the AFR this morning is ‘Asset prices can get us out of this funk‘.That’s practically a confession. Mr Bassanese is advocating mass counterfeiting to enrich the asset owning class at the expense of ordinary Australians. Arrest him!

One member of the banking cartel that is the American central bank decided to turn himself in and come clean on this very topic. On CNBC and in the Wall Street Journal, former Fed Official and self proclaimed Quantitative Easer Andrew Huszar apologised to the country for his actions: ‘I can only say: I’m sorry, America… The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.‘ Fact!

Huszar continued: ‘Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009…

A coup as well! This just keeps getting worse.

Another former Federal Reserve Committee member, Kevin Warsh, explained in the WSJ that even the government is involved in this theft. ‘…you can count on Congress to continue with its egregious generational theft and destroy our nation’s finances…

cNow all of this is going to end badly. That’s what Richard Cantillion first figured out when he watched Bernanke and Yellen’s intellectual forefather John Law inflate the French money supply. Inflation doesn’t just reallocate wealth to the rich. It also messes with the capital structure of the economy. And that causes recessions.

After the hyperinflation and economic collapse in France, Cantillion published a book that was basically an enormous ‘I told you so’ to the inflationists. He was promptly murdered under suspicious conditions. Sort of like the four American Presidents who stood up to the money printers of their times.

But what can you do about all this? Buy hard assets at record prices? What if there is a recession and asset prices collapse?

We’ve answered those questions in an upcoming video. Filming finished yesterday, so keep an eye out.

In the meantime, there are plenty of assets out there far from record highs. Gold and other precious metals for example. And their corresponding stocks, too.


Nick Hubble+
for The Daily Reckoning Australia

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Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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2 Comments on "Wealth Caused By Inflation: The Cantillion Effect"

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slewie the pi-rat
slewie the pi-rat
2 years 11 months ago
i tend to accept the FED, because it is not something in my power to control or change. so, i tend to focus on what the FED is, rather than isn’t, what it is actually doing, as contrasted with what it ‘should’ do. not that i haven’t had my rants and raves. yet, like Clouseau, i would rather investigate than castigate, rather try to self-educate than blindly hate. studying the FED has taught me a lot about what i don’t know and if there is any topic with WAY more questions than answers, it would be bankstering. like Johnny Nash,… Read more »
Geoff Taylor
Geoff Taylor
2 years 11 months ago
Nick Why the anti-Semite prefix to Keynes ? This type of thing distracts from whatever point you are trying to make. I have lifted the extract below from wiki, does not appear to be anti-Semite to me. Some critics, such as Rothbard, have sought to infer that Keynes had sympathy with Nazism, and a number of writers have described him as anti-Semitic. Keynes’s private letters express portraits and descriptions some of which can be characterised as anti-Semitic, others as pro-Semitic.[109][110] Scholars have suggested that these reflect clichés current at the time that he accepted uncritically, rather than any racism.[107] Keynes… Read more »
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