Cantillion Effects Part II

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This is a follow-up to my original post on the Cantillion effects. After seeing how Cantilllion effects work, let's look at a hypothetical example from an article from the mises institute titled "Understanding the Federal Reserve’s Shell Game". Even though it isn't explicitly stated, this is how the Cantillion effects work in the US government.

….Uncle Sam uses his fiat money power: his ability, based on the government’s monopoly control over the money supply, to inflate (defined here as monetary expansion). As the God of the Bible could say “let there be light” (in Latin, fiat lux) and it was so, the modern omnipotent State can say “let there be money” (fiat money or fiat pecunia) and it is so. With his right hand, Uncle Sam adds $200 million to his Treasury bank balance by simply writing it on his ledger. Voilà, he now has $200 million, simply because he says so. He can then transfer the new money to his workers, contractors, and dependents.

It would seem the public wasn’t taxed at all. Uncle Sam’s balance increased, but the cash balances of the populace did not diminish. So no skin off the backs of the people, right? Does anybody lose when the government gains in this magical way? When you think about it, somebody must lose. After all, it’s not really magic.
The true wealth of society  —  what actually sustains human life and makes it more comfortable and delightful  —  is the stuff we buy with money; not money itself. It’s the food, clothing, housing, smartphones, mountain bikes, and other consumers’ goods. It’s also the farmland, factories, robots, raw materials, labor and other producers’ goods used to make those consumers’ goods.

This leads to an uncomfortable truth about money; it has no value. The intrinsic value of fiat money will always be 0. It makes sense when you think about it. If money had actual value and government has the sole control of the money supply, why can't uncle Sam just inflate his bank account and call it a day?

Because it has no real value. What do governments do when they have money? They spend it of course which partly explains why our debt has reached record levels. And what do they spend it on? The above quote already provide a hint.

the farmland, factories, robots, raw materials, labor and other producers’ goods used to make those consumers’ goods.

This is what uncle Sam wants. He doesn't want your money. Why would he? He has full control of the money supply. Money is a mere tool for uncle Sam to take real wealth away from normal people into his hands. The Cantillion effects explain how it is done. The article goes on to say,

Let’s say instead of the Treasury creating the $200 million, it borrows it from an investment bank, like Goldman Sachs. Let’s see if, working together, Uncle Sam and Goldman can inflate, and both come out richer with a stroke of a pen, at the expense of the public, without it being clear that they did.
To borrow the funds, Uncle Sam’s Treasury right hand writes on a piece of paper: “IOU $200 million.” That represents a bond issue. Goldman lends the government money by purchasing the bonds. $200 million transfers from Goldman’s ledger to Uncle Sam’s. And in return, Uncle Sam gives Goldman a transferable IOU which gives the holder the right to collect $200 million from Uncle Sam later, plus interest. Then, the Uncle Sam transfers the newly borrowed $200 million to his bureaucrats, contractors, and dependents. And now the Treasury owes Goldman $200 million plus interest.
But that’s where Uncle Sam’s left hand finally comes into play (shell games usually require two hands). His left hand is the Federal Reserve. In the US government’s real-life arrangement, it is the Fed, not the Treasury, that has the power to create new money.
Now the Fed goes shopping for government debt. Lo and behold, it finds that Goldman Sachs is selling $200 million in Treasury bonds. Let’s say the Fed then pays $205 million for the bonds, giving Goldman a tidy profit. But of course the Fed has its own peculiar way of paying. Uncle Sam just reaches over with his Federal Reserve left hand and credits Goldman’s account $205 million by simply writing it directly on the investment bank’s ledger. Keep your eye on the ball! That money was conjured out of thin air. That is where the inflation occurs in the slightly more elaborate process. “Fiat pecunia!” says Fed Chair “Hermione” Yellen. For all its technocratic jargon, this sleight-of-hand is pretty much the only “magic” trick the Fed knows.

Now let’s review. Who benefits? Goldman Sachs has $5 million in profit. And Uncle Sam was able to pay off his crew. At what cost? Well, the Federal Reserve has $200 million in Treasury IOUs. But that only means the Treasury owes the Fed $200 million plus interest. In other words, Uncle Sam’s right hand owes his left hand some money. But it’s all Uncle Sam; it’s all the same government.

This is more of a real world example of the Cantillion effects in actions. This is new money that is being created. Did that new money go into the hands of the poor or the middle class who really need it? No the new money was created solely for uncle Sam so he can spend it on his selfish interests and needs.

When you think about it, the government could fix inequality by simply giving the new money straight to the impoverished. But uncle Sam doesn't care about them. Money is created for his interests alone. Money is nothing but a tool for him and his friends to take our assets.

It Uncle Sam wasn't there, those assets and businesses that he stole with his new money, would have gone back to the people, the free market. The land, the natural resources, the businesses would be available for those who are willing to work for it. That is how real opportunities and jobs are created for the people.

This is a vision that I hope cryptocurrency can bring into reality. Unlike fiat, the government cannot mint new Bitcoins to inflate their own accounts. Whatever Uncle Sam cannot afford to do with his limited tax power, will be done by the people. This would facilitate a more fair and free market where people no matter which race, class, or creed can look forward to building their own future and not the one Uncle Sam has given them.

This is where the real value of crypto can come into play. Not as an investment into our financial future, but as an investment into a new world.