Cantillion Effect, Inflation and the Reverse Repo Market

The Cantillion Effect is when new fiat currency is printed into the system and the manner in which it flows. As new money is created it is first injected into the system through large banks, corporations and hedge funds.
Large banks get free money from the Federal Reserve and then loan it out at higher rates to make a profit.

Corporations are able to have their debt level increased through cheap loans to continue business and to buy up other assets.

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Hedge Funds able to lever up:

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All three of these entities benefit when the federal reserve buys up financial assets such as government debt:

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Mortgage backed securities:

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The Federal Reserve tapped the massive equity firm Blackrock last year to facilitate the buying of junk bond ETFs for the Federal Reserve to backstop corporate debt, that was so unattractive the only way to prevent it from free falling in price and dragging the economy with it is to buy it up. The Federal reserve not only bailed out Blackrock for their holding of junk debt, but Blackrock even generated fees on buying its own ETF. It gets worse, the ETFs that the Federal Reserve signaled they were going to buy were front run by Blackrock. The conflict of interest is beyond blatant.
This is the same Blackrock that made news by buying up residential real estate at breakneck speed with above market offers. They are using the 0% loans to offer above market value all but guaranteeing them the purchase. This has been turning the real estate sector into the hottest it has ever been. Blackrock has done this under the entity known as “Invitation Homes”. The following is an excerpt of a Slate article.

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Blackrock is not alone, the creatively named Blackstone has been using the same Cantillion Effect powers to gobble up all the available supply of real estate.

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The effect across the real estate has been specifically difficult in certain cities.

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This is while Bill Gates has become the largest farm land owner on the planet.

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Billionaires wealth has risen in lockstep with the money printing. Due to their ownership of profit generating businesses, stock, and/or actual commodities. This is happening while the average persons wealth is decreasing on that relative basis.

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This has been exacerbated by the COVID lockdowns destroying the labor market and a certain strata of workers choosing government unemployment benefits instead of going back to their actual job. The cost of actual an actual hour of labor is skewed. If you’re on unemployment benefits then the cost of your labor is the total dollar value of what you would earn in wages minus the unemployment benefits.

The following is from Goldman Sachs’ recent research into how much it will take, the number sits at 26% from pre pandemic levels.

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The benefit of these entities getting the “first spend” of this freshly minted currency is that the most value that dollar will hold is when it is spent into the system. The flow of value of the freshly printed currency goes first to financial instruments, as they did after the March 2020 crash. After derivatives the money will flow into commodities and material goods.
As of now, velocity is low, which keeps inflation low to the untrained eye. However with the reopening of the economy and pent up cash reserves, inflation will see acceleration in the coming months. Along with the fear of inflation that is growing.

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Houses aren’t being built at the same rate dollars are being created. Steel isn’t being produced at the same rate dollars are being created. Cows aren’t being raised at the same rate dollars are being created. Trees aren’t growing at the same rate dollars are being created. Oil isn’t being drilled at the same rate money is being created. Gold or bitcoin aren’t being mined at the same rate dollars are being created.

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The cost of raw materials are all getting more expensive, along with the shipping of all those materials.

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Finally the currency flow will reach workers wages. After all the asset prices have been inflated, after the value of buying a house and therefore rent has increased, after the price of food has been raised, after the price of fuel and energy has been raised. Then the flow of new money will reach the average worker.

Regardless of what the White House says, food is getting more expensive.

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The massive printing of currency not only expands the wealth gap in America, but it has created massive issues in the “plumbing” of the financial system. Specifically in the reverse repo market.

To understand the reverse repo market we must understand the repo market first. The repo market is where the large banks are able to go overnight to obtain liquidity. It works similar to a pawn shop. The large banks will “trade” a financial asset, usually a treasury or a bond for cash, paying a low interest rate in the process.

The reverse repo market is exactly that, the reverse of it. When the banks have so much extra cash and they don’t have anywhere for it to go, they will “trade” it into the reverse repo market to obtain some yield, currently a .05% yield.

The issue currently is that the reverse repo numbers have been going absolutely bananas. The following chart and graphic is from Zerohedge.

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The amount of liquidity that banks hold right now is so high they have nowhere to put it. Yet, without the continued currency printing, the house of cards will fold.
The overnight reverse repo market is the top thing people should be watching in the next few weeks.

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