The Hidden Laws Governing Your Money: What Every Consumer Should Know
The Forgotten Laws of Money: From Gresham to Cantillon - YouTube
A Consumer Reports Investigation: How Six Economic Principles Explain Why Your Wallet Feels Lighter
Bottom Line: Recent research confirms that centuries-old monetary principles continue to shape modern financial markets, often disadvantaging ordinary consumers while benefiting financial insiders. Understanding these "laws" can help protect your savings and investment decisions.
The Investigation
While politicians debate fiscal policy and central bankers adjust interest rates, most consumers remain unaware of the fundamental economic principles that determine whether their money gains or loses value. Our investigation into recent academic research, central bank data, and policy documents reveals six key "laws" that govern how money behaves—and why the system often seems rigged against average savers.
Law 1: The Cantillon Effect - Why New Money Helps Wall Street First
What it is: When central banks create new money, it doesn't spread evenly through the economy. Those closest to the source—banks, financial institutions, and large corporations—receive it first and can spend it before prices rise across the economy.
Recent evidence: The Federal Reserve's $4.5 trillion in asset purchases during COVID-19 dwarfed the $400 billion in direct stimulus checks to consumers. As of June 2024, the U.S. government debt stands at $34.84 trillion and continues growing, requiring constant money creation that follows the same pattern.
Impact on consumers: By the time newly created money reaches average consumers, prices for goods and services may have already increased, effectively reducing the purchasing power of those at the bottom of the economic ladder. Recent studies show this creates a "regressive tax" effect, where wage earners are the worst off as they see increased cost of living before any wage adjustments.
Consumer protection: Diversify into assets that historically outpace inflation, such as stocks, real estate, or precious metals, rather than holding excess cash during periods of monetary expansion.
Law 2: Gresham's Law - Bad Money Drives Out Good
What it is: When two forms of currency with the same legal value but different intrinsic worth circulate together, people spend the inferior money and hoard the superior money.
Modern applications: Bitcoin advocates argue this law explains why people hold Bitcoin (viewed as "good money" with limited supply) while spending fiat currencies. In hyperinflationary environments like Zimbabwe in 2008, people fled to foreign currencies and hard assets, abandoning the rapidly devaluing local currency.
Recent research: A September 2024 study by Sergey Avetisyan provides new historical analysis and theoretical implications, while as of January 2024, 28 public companies hold $11 billion in Bitcoin according to CoinGecko.
Consumer implications: During periods of currency debasement, consumers naturally gravitate toward holding assets they view as more stable, even if it means using depreciating currency for daily transactions.
Law 3: Triffin's Paradox - The Reserve Currency Trap
What it is: Countries whose currencies serve as global reserves must run trade deficits to supply the world with their currency, but these deficits eventually undermine confidence in the currency.
Current crisis: The US dollar is used in approximately 88% of currency exchanges and 59% of all foreign currency reserves, but BRICS countries are actively developing alternatives, including a Cross-Border Payment Initiative using national currencies instead of dollars.
Recent developments: Central banks bought gold at record rates in 2023 and accelerated purchases in 2024, with 1,045 metric tons added to reserves in 2024 alone—about 25% of annual global mine production. Despite these challenges, analysts remain doubtful about the feasibility of implementing coordinated alternatives anytime soon.
Consumer impact: Dollar dominance allows Americans to borrow at lower rates but makes the economy vulnerable to shifts in global sentiment. A weakening dollar could boost exports but increase import costs.
Law 4: Financial Repression - The Hidden Tax on Savers
What it is: Government policies that direct funds to government use at below-market rates, including caps on interest rates and requirements for banks to hold government debt.
Current magnitude: The IMF estimated global public debt at more than $100 trillion in October 2024, or around 93% of global GDP, with potential to reach 100% by 2030. U.S. net interest costs totaled $880 billion in 2024, with Congressional Budget Office projections showing costs almost doubling to $1.8 trillion by 2035.
Evidence of current repression: The German central bank's 2024 study examined how financial repression influenced U.S. debt-to-GDP ratios after WWII by requiring banks to hold government bonds. Between 2007 and 2013, eurozone banks more than doubled their government debt holdings, often under government pressure.
Consumer cost: Financial repression rewards debtors and punishes savers, especially retirees whose investments no longer generate expected returns. The policy effectively transfers wealth from savers to heavily indebted governments.
Law 5: Goodhart's Law - When Targets Become Meaningless
What it is: "When a measure becomes a target, it ceases to be a good measure", formulated by British economist Charles Goodhart in 1975.
Monetary policy failures: In the 1970s, when the Federal Reserve began targeting money growth to control inflation, the historical relationship between money growth and inflation immediately dissolved. When companies use earnings per share as targets, executives may use financial engineering like share buybacks to boost numbers without improving long-term prospects.
Current applications: The law applied to the British government's COVID-19 testing targets, where the reported numbers far exceeded useful diagnostic tests when the government announced meeting its 100,000 tests per day target.
Consumer lesson: Be skeptical of heavily promoted economic metrics. When policymakers focus intensively on specific numbers, those metrics often lose their meaning as reliable indicators.
Law 6: Diminishing Returns on Debt - The Endgame Arithmetic
What the research shows: As debt levels rise, each additional dollar of borrowing produces less economic growth. Annual interest payments on U.S. debt are projected around $1.4 trillion, a burden rivaling the Pentagon's budget, with interest costs already eclipsing defense spending by 2024.
The math problem: The U.S. has carried debt since inception, but recent spikes from the 2008 recession, wars, and COVID-19 have accelerated the trajectory. When borrowing no longer generates productive growth, it becomes a drag on the entire economy.
Historical precedent: Every major empire has faced this reckoning when debt service consumes increasing portions of national output, leaving less for productive investments.
What Consumers Can Do
Based on our analysis of recent research and policy developments:
For Savers:
- Recognize that traditional savings accounts may not preserve purchasing power during inflationary periods
- Consider Treasury Inflation-Protected Securities (TIPS) for inflation hedging
- Diversify across asset classes and geographic regions
For Investors:
- Understand that asset price inflation often precedes consumer price inflation
- Be aware of the Cantillon effect when evaluating market timing
- Monitor central bank balance sheet changes as early indicators
For Borrowers:
- Fixed-rate debt can be advantageous during inflationary periods
- Consider the real (inflation-adjusted) cost of borrowing
- Avoid over-leveraging as financial repression policies can change
The Bottom Line
These monetary laws aren't abstract economic theory—they're practical realities that affect every consumer's financial life. As governments face a "fiscal policy trilemma" of security costs, population aging, and climate change without jeopardizing debt sustainability, understanding these principles becomes crucial for protecting your financial future.
The system may not be designed for ordinary consumers to win, but knowledge of its rules can help level the playing field.
Six Ancient Laws of Money Still Shape Markets Today
Centuries-old economic principles explain why inflation benefits some while punishing others
By Financial Markets Reporter
Federal Reserve officials gather this week to discuss interest rates, but their deliberations will be governed by economic principles first articulated centuries ago—laws of money that continue to determine winners and losers in today's financial system.
From Richard Cantillon's 18th-century observations about inflation's uneven effects to Sir Thomas Gresham's advice to Queen Elizabeth I about currency debasement, these monetary principles offer a framework for understanding why recent policy decisions have produced such disparate outcomes for different segments of society.
The Cantillon Effect: First Access, First Advantage
When the Federal Reserve expanded its balance sheet by $4.5 trillion during the pandemic while distributing just $400 billion in direct payments to households, it illustrated what economists call the Cantillon effect—the phenomenon whereby those closest to new money creation benefit first and most.
The effect, named after 18th-century economist Richard Cantillon, describes how newly created money moves from central banks to private banks to Wall Street before reaching ordinary consumers, creating an arbitrage opportunity for early recipients who can spend before prices rise.
"The first recipients of the money experience an increase in wealth, while those who do not receive it experience a decrease in wealth," according to recent research published by the Mises Institute. By the time new money reaches those on the periphery of the financial system, prices have increased substantially, offering little benefit to late recipients.
The mechanics play out predictably during each monetary expansion. Banks and financial institutions gain early access to freshly created money, allowing them to acquire assets at pre-inflation prices. Asset prices—stocks, bonds, real estate—rise first. Consumer goods follow months later, by which time wage earners face higher costs without proportional income increases.
This dynamic helps explain why stock markets surged during periods of monetary accommodation while many Americans struggled with rising costs of housing, food and energy.
Gresham's Law in the Digital Age
The principle that "bad money drives out good" has found new relevance as governments worldwide grapple with currency debasement. Named after Sir Thomas Gresham's 16th-century advice to Queen Elizabeth I about debased coinage, the law states that when currencies of different intrinsic value circulate together, people spend the inferior money while hoarding the superior.
Contemporary applications extend beyond traditional currencies. As of January 2024, 28 public companies hold $11 billion in Bitcoin, viewing the cryptocurrency as "good money" with limited supply compared to fiat currencies subject to unlimited expansion.
The law's reverse—where good money drives out bad—manifests during hyperinflations. In Zimbabwe's 2008 crisis, citizens abandoned the rapidly depreciating local currency for U.S. dollars and other foreign currencies, effectively dollarizing the economy despite government resistance.
Modern investors apply similar logic, gravitating toward assets they perceive as stores of value during periods of currency uncertainty.
The Reserve Currency Trap
The Triffin dilemma, identified in the 1960s by Belgian-American economist Robert Triffin, describes the conflict between short-term domestic and long-term international objectives for countries whose currencies serve as global reserves.
The United States must run trade deficits to supply the world with dollars for international trade, but persistent deficits eventually undermine confidence in the currency—creating what Triffin called an unsustainable paradox.
Current developments suggest this tension is intensifying. BRICS nations are developing a Cross-Border Payment Initiative using national currencies instead of dollars, while central banks purchased gold at record rates in 2024—1,045 metric tons, representing about 25% of annual global mine production.
Despite these challenges, the dollar remains dominant, accounting for 59% of global central bank reserves and used in approximately 88% of currency exchanges. Yet economists warn that Triffin's paradox makes this dominance ultimately unsustainable.
"To remain the world's reserve currency, the U.S. must sacrifice the health of its own economy," explains the underlying contradiction that has persisted since the 1971 end of dollar-gold convertibility.
Financial Repression Returns
With global public debt exceeding $100 trillion—93% of global GDP—and potentially reaching 100% by 2030, governments face mounting pressure to implement what economists call financial repression: policies that channel funds to government use at below-market rates.
The strategy includes directed lending to government by banks and pension funds, caps on interest rates, and regulatory requirements that encourage government bond purchases. Such policies effectively tax savers to benefit heavily indebted governments.
Historical precedent exists. Between 1945 and 1980, the United States kept real interest rates below 1% for two-thirds of the period, enabling the government to "inflate away" substantial post-war debt burdens.
Between 2007 and 2013, eurozone banks more than doubled their holdings of government debt, with bankers reporting pressure from governments to buy at debt auctions. U.S. banks similarly increased government debt holdings following 2014 liquidity requirements.
Current conditions suggest renewed financial repression. U.S. net interest costs totaled $880 billion in 2024, with Congressional Budget Office projections showing costs nearly doubling to $1.8 trillion by 2035.
When Measures Become Targets
Charles Goodhart's observation that "when a measure becomes a target, it ceases to be a good measure" emerged from 1970s monetary policy experiences in Britain.
The law gained prominence when the Federal Reserve began targeting money growth to control inflation in the 1970s, only to see the historical relationship between money growth and inflation dissolve once it became a policy target.
Modern applications abound. Companies targeting earnings per share may pursue share buybacks that boost metrics without improving underlying performance. Governments setting economic indicators as explicit goals often achieve statistical targets while failing to address underlying economic realities.
The principle warns against over-reliance on any single metric for policy guidance, suggesting that measurement systems inevitably break down when used for control purposes.
The Arithmetic of Unsustainable Debt
The final principle governing modern monetary systems is the diminishing returns on debt—the mathematical reality that each additional dollar of borrowing produces progressively less economic growth.
Annual U.S. interest payments approach $1.4 trillion, rivaling defense spending and consuming an increasing share of federal revenues. When debt service crowds out productive government investments, the borrowing itself becomes economically counterproductive.
Historical analysis shows this pattern preceding the decline of major powers throughout history. As borrowing costs consume larger portions of national output, governments face increasingly limited options for addressing fiscal imbalances.
Market Implications
These principles collectively suggest several investment themes for the coming decade:
Asset price inflation will likely precede consumer price inflation, benefiting early holders of financial assets while disadvantaging wage earners and cash savers. Currency competition may intensify as reserve currency stability comes under pressure. Financial repression policies could cap interest rates below inflation levels, effectively taxing traditional savers.
Understanding these dynamics provides context for policy decisions that might otherwise appear arbitrary or politically motivated. The laws of money, developed through centuries of economic crisis and recovery, continue to govern financial markets regardless of contemporary political preferences.
For investors and savers, recognizing these patterns offers guidance for navigating an environment where monetary policy increasingly serves fiscal needs rather than price stability objectives.
The reporter covers Federal Reserve policy and monetary economics for The Wall Street Journal.
Sources
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