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Dear Fellow Traveler, Every time new money is created, someone gets it first. That is not controversial. What happens next is. The first recipients get to spend that money before prices adjust. They buy assets at yesterday’s prices. They load up on stocks, real estate, and bonds. They’ll encourage merger activity in entire companies. By the time the money reaches wages and savings accounts, prices have already moved. This is called the Cantillon Effect. Most people have never heard the term, but they live inside it every day. So here is the obvious question that nobody likes to ask out loud: If money creation benefits some people before others, has anyone ever proposed taxing the people closest to where the money enters the system? The answer is yes. Repeatedly. For centuries. And almost every time, the idea quietly disappears. Let’s explain why. Money Is Not Neutral.In textbooks, money enters the economy evenly. Like rain… gentle and democratic. Everyone gets wet. In reality, money enters through pipes. Central banks create reserves. Reserves go to primary dealers. Primary dealers interact with sovereign debt markets. Asset markets move first. Wages move last. That sequence matters. If you are closest to the pipe, you benefit from the pressure. If you are far away, you feel the splash after prices rise. That gap is not a bug. It’s just how the system works… The First Serious Attempt: Tax the Windfall, Not the WorkLong before central banks looked like they do today, one economist noticed something strange. Economic growth made landowners rich even when they did nothing. Cities grew and commerce expanded. Credit increased, and land prices (that finite resource) exploded. The people who owned land captured the gains simply because they were close to the activity. The proposal was simple. Tax the increase in land value, not labor or production. The logic maps cleanly onto modern money creation. When liquidity expands, real estate absorbs it early. A land value tax would have skimmed gains right where new money concentrates. The idea was admired… then debated… and, of course, never fully adopted. It asked the wrong people to pay. Taxing the Flow Instead of the SourceLater proposals tried something safer. Instead of taxing who receives new money, tax how fast it moves. This is where transaction taxes came in. Most famously, taxes on short-term capital flows. The logic was polite and technical. This would slow speculation and reduce volatility. It would… in practice, improve stability. But this approach misses the Cantillon effect entirely. By the time money is flowing fast enough to be taxed, the advantage has already been captured. Assets have already repriced, and the winners have already rotated into something else. Taxing motion is not the same as taxing privilege. After 2008, something new happened. Central banks stopped pretending money creation was abstract. They bought assets (like bonds) directly. Stocks went up. Real estate went up. Bond prices went up. But wages did not keep up. A few economists suggested something radical. If asset prices rise primarily because of central bank action, then capital gains tied to that action are not earned in the traditional sense. They are windfalls. The implication was explosive. Just tax those gains, right?. This idea never made it past polite conversation. Because to implement it, you would have to admit something very uncomfortable. Monetary policy is redistributive. Once you say that out loud, you cannot unsay it. The Bank Reserve Problem Nobody TouchesHere is the closest proposal to a true Cantillon tax. Banks receive newly created money first. They sit on reserves, and they deploy them when it suits them. Some economists proposed taxing excess reserves. Not taxing lending or deposits. But just the concept of idle privilege. If you get first access to money creation, you either use it productively or you give some of it back. Instead, central banks did the opposite. They paid interest on reserves. That means the people closest to money creation did not get taxed. They got paid. That was not an accident. It was a choice… The Modern Excuse: We’ll Fix It LaterModern monetary thinkers often admit the Cantillon effect exists. Their solution is always the same, and that they will just fix it with taxes later. They kick the can down the road on ideas like progressive taxation and wealth taxes. They discuss capital gains adjustments and the launch of new social programs. The problem is timing. By the time taxes arrive, asset prices have already reset higher. The wealth has already compounded. And… the political resistance has already hardened. You cannot retroactively tax a structural advantage that has already been converted into ownership. It just doesn’t work. That is like taxing the smoke after the fire is out. Why This Never ChangesThere is a simple reason no true Cantillon tax has ever been implemented. The people closest to money creation also design the rules. Think Congressional leaders (Nancy Pelosi!), Primary dealers, large banks, sovereign debt managers, and governments themselves. A real Cantillon tax would raise borrowing costs. It would compress asset prices (and likely lead to a decline in valuations… quickly…) It would expose monetary and fiscal policy as mechanisms for transferring wealth. So instead, modern systems tax the opposite end of the pipe. They tax labor (which is stupid as hell because it taxes people’s time). They tax consumption (which reduces demand). They tax savings through inflation (which most people don’t think about). The further you are from the source of money creation, the heavier the burden becomes. It’s so stupid it hurts… The Money Printer RealityMoney is created at the top. Benefits concentrate early. Costs diffuse later. Every proposal to reverse that flow runs into the same wall. Power does not tax itself at the source. It taxes activity downstream and calls it fairness. It creates perverse incentives that fuel rent-seeking… Understanding this does not make you cynical. It makes you realistic. Once you see where the money enters, you stop arguing about why prices feel higher than your paycheck. You stop expecting neutral outcomes from non-neutral systems. And you start positioning yourself closer to the pipe. That is not moral advice (I’m not running for office). It’s just basic survival math. Stay positive, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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