The Cantillon Effect: Why U.S. Billionaires’ Wealth Increased by $2.1T During the Pandemic

Inequality continues to grow in America, which will face an explosive social situation for years to come.

For a few days, Elon Musk is now the richest man on the planet. The founder of Tesla and SpaceX has dislodged his great rival for the conquest of space Jeff Bezos.

With a fortune of $219 billion at the time of writing, Elon Musk is now over $20 billion ahead of Jeff Bezos.

Since the estimated wealth of these Tech multi-billionaires is mainly based on the valuation of their companies on the stock market, it can fluctuate very quickly. Nevertheless, the trend since the start of the COVID-19 pandemic is clear: the fortunes of these entrepreneurs have exploded phenomenally.

The ultra-rich have seen their wealth explode since the beginning of the pandemic due to the ultra-accommodating monetary policies of central banks

A report by the Institute for Policy Studies (IPS), which tracked the earnings of American billionaires between March 18, 2020, and October 15, 2021, showed that the wealth of this privileged club increased by $2.1 trillion during the pandemic.

This only confirms what has been expected since the Fed and other major central banks began opening the floodgates in March 2020. To combat the economic consequences of the pandemic, the central banks of the world's major economic powers have all followed the same approach:

• Lowering interest rates to zero (or even negative territory for the European Central Bank)

• Massive asset purchase program in infinite mode

• Printing fiat money out of thin air

More than 35% of all dollars in circulation today have been printed in the last 18 months. A central bank cannot print so much money out of thin air without triggering very high inflation. Once again, this is what was expected: inflation has been above 5% in America for several months now.

The Fed's monetary policy has pushed all investors into the stock market, which has resulted in a real Tech bubble. This bubble has made the valuation of the Tech giants explode, which has necessarily strengthened the fortune of American billionaires like never before in such a short period.

The current phenomenon has been described since the 18th century and is called the Cantillon Effect

If you are interested in economics, you must have recognized here a well-known phenomenon described as early as the 18th century by the French banker and philosopher Richard Cantillon.

In a book called “An Essay on Economic Theory”, Richard Cantillon already described a version of this phenomenon. His basic theory was that who benefits from the printing of large amounts of money by the state depends on the institutional configuration of that state.

In the 18th century, this meant that the closer you were to the king and the rich, the more you benefited. The further away you were, the more you were harmed. Money, in other words, is not neutral. This general observation, that money printing has distributional consequences that operate through the price system, is known as the Cantillon Effect.

In Richard Cantillon's time, the basis of money was gold. He described what happened when a nation-state discovered a gold mine in its territory. The parallel is feasible with the current system based on the American dollar. Richard Cantillon concludes that if the money will eventually trickle down to the poorest people, it will be far too late because these people will already have been hit hard by the effects of inflation.

This is exactly what is happening now.

Elon Musk saw his fortune grow by $194 billion during the COVID-19 pandemic

Meanwhile, billionaires around the world are seeing their wealth explode phenomenally as between March 2020 and March 2021, the overall wealth of billionaires around the world increased by $4,000 billion. In the United States alone, the number of billionaires increased from 614 in March 2020 to 745 in October 2021.

The prize by far goes to Elon Musk, as his fortune has increased by $194 billion since March 2020 to $219 billion. He benefits from the explosion of Tesla's valuation on the stock market. A lot of people now think that Elon Musk could reach a net worth of $1T in the future.

Behind him, we find Jeff Bezos who saw his fortune increase by 85 billion dollars. Google founders Larry Page and Sergey Brin complete the podium with an increase in their respective fortunes of 69 billion and 67 billion dollars.

These phenomenal figures are coming to the forefront as American society faces a wave of inequality exacerbated as never before by the COVID-19 pandemic. Thousands of American workers are going on strike across the country to demand better working conditions, but more importantly, higher wages so that they can live decently, rather than just trying to survive.

This increase in inequality is turning into a socially explosive situation for America

More and more Americans are leaving their jobs disappointed by an increasingly unequal society, creating a labor shortage that will drive up wages in the coming months.

It is indeed incomprehensible to these millions of workers that they must bear the full brunt of the Cantillon Effect when the richest 1% of Americans have just surpassed the entire middle class in wealth.

This inequality is made worse by the fact that a recent study found that the richest 1% of Americans do not report a quarter of their income. The underreporting of income is almost twice as high for the richest 0.1%, which could represent billions of dollars in unreported taxes.

The U.S. Treasury Department will have to intervene to address this growing malaise in American society.

Until a fairer tax system is put in place so that American billionaires contribute more, it is expected that their wealth figures will continue to grow in the months to come. Indeed, the situation will remain the same as long as central banks do not change their ultra-accommodating monetary policies.