> The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change

> The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased. This theory is fundamentally flawed, because it assumes that whoever receives the “new money” buys consumer goods. If this is indeed what happens, then prices should increase. But what if he buys bonds? If newly produced money is used, not to buy consumer goods (or commodities), but bonds, then the injection of new money into the economy has the opposite effect on the price level, because the new money is used to improve the efficiency of production. E.g. if a producer of chickens sells a $250m bond (bought with “new money”) and invests the proceeds in a chicken plant[1], the price of chickens will decrease, due to increased productivity of producing chickens. In the above scenario, the only price that will increase is the price of bonds, which is the same as a falling rate of interest (the rate of interest is inversely proportional to the price of the bond). And this is exactly what has been happening for the past 35 years or so[2]. [1] https://markets.businessinsider.com/news/stocks/costco-plans-to-keep-rotisserie-chicken-at-5-dollars-2018-9-1027555791 https://markets.businessinsider.com/news/stocks/costco-plans... [2] https://awealthofcommonsense.com/wp-content/uploads/2015/12/Screen-Shot-2015-12-16-at-3.26.43-PM.png https://awealthofcommonsense.com/wp-content/uploads/2015/12/...