AI Wealth Truth (12): Why Inflation Is a Hidden Wealth Transfer

I. Inflation is often described as "prices going up". The government tells you: inflation is 3% this year, meaning average prices rise 3%. It sounds like a uniform phenomenon that affects everyone the same. That is a carefully designed misdirection.

II. Inflation is not, at its core, "prices going up". Inflation is, at its core, currency debasement. When the government prints more money, each unit buys less. But the key question is: how does the newly printed money enter the economy? It does not fall evenly onto everyone's head.

III. In 1755, the Irish economist Richard Cantillon first described this phenomenon. It later became known as the Cantillon effect. The core idea is: the economic impact of newly created money depends on the path by which it enters the economy. Whoever gets the new money first profits. Whoever gets it last pays.

IV. When a central bank prints money, where does it go first? To banks. To financial institutions. To large corporations. To the government. These "first receivers" can buy assets with the new money, before prices rise. They buy cheap assets.

V. Then the money starts circulating through the economy. Financial institutions invest the new money in stocks, and stock prices rise. Companies use new money to buy property, and housing prices rise. Slowly, money flows downstream through supply chains. Suppliers raise prices. Retailers raise prices. By the time the money reaches ordinary consumers, prices have already risen across the board.

VI. Ordinary workers sit at the end of the chain. When they finally receive wage increases, inflation has already happened. And wage growth often fails to beat inflation. They pay higher prices for goods and can buy less than before.

VII. This means inflation is a hidden wealth transfer. From the end of the chain (workers, savers) to the top (banks, asset holders). Money in your bank account may lose 3% to 5% of purchasing power each year. But your wage growth may be only 2%. You get poorer every year, even if your account balance number grows.

VIII. During the pandemic in 2020, the Federal Reserve flooded the system with liquidity. Trillions of dollars were effectively "printed". Where did it go? Stocks rose. Housing prices rose. Crypto rose. People with assets saw their wealth explode. People without assets saw their purchasing power collapse.

IX. The Fed called this policy "quantitative easing". The official story was: stimulate the economy and create jobs. The real effect was: asset prices surged, and asset holders, mostly the rich, benefited. People without assets faced higher housing costs and higher living costs. It was one of the largest wealth transfers in history.

X. Some calculated that from 2020 to 2021, U.S. billionaires' total wealth rose by $1.3 trillion. In the same period, tens of millions lost jobs and collected unemployment benefits. The newly printed money did not flow to the unemployed. It flowed into billionaires' brokerage accounts.

XI. There is an even more hidden mechanism: asset price inflation is not counted in CPI. CPI (the Consumer Price Index) measures consumer goods prices. It does not include housing prices, stock prices, or art prices. So official inflation may be 3%, while housing prices rise 10%. The inflation you feel can be far higher than the number the government reports.

XII. This explains a common puzzle: why does GDP grow and macro data look good, yet ordinary people feel life has not improved? Because newly created wealth concentrates in asset prices. People who hold assets see their paper wealth rise. People who do not hold assets see living costs rise. Economic indicators and your lived experience can be completely disconnected.

XIII. The Cantillon effect has a time dimension too. Those who bought homes early captured the upside of rising prices. Those who buy late have to enter at much higher prices. Same hard work, but early entrants and late entrants end up with completely different destinies. Your birth year becomes a form of luck.

XIV. People who bought in the 1990s faced a reasonable price-to-income ratio. Young people buying in the 2020s face prices that are tens of times their income. They may work just as hard, or even harder. But they start behind, because they are at the end of the Cantillon chain. This is an intergenerational wealth transfer from the young to the old.

XV. How does the AI era affect this? AI investment requires enormous capital upfront. Training a large model can cost hundreds of millions of dollars. Where does that money come from? The financial system. Central banks' low-rate policies. AI companies sit at the top of the Cantillon chain. They are the first to get cheap funding. Ordinary people sit at the bottom. They bear the inflation costs, but capture none of the AI returns.

XVI. There is a deeper possibility: AI may create deflationary and inflationary pressure at the same time. AI raises productivity and may push down goods prices (deflation). But governments may print money at scale to respond to unemployment (inflation). The end state could be: goods are cheaper, but assets, especially housing, are more expensive. You can afford a phone, but not a home.

XVII. Inflation is not a natural disaster. Inflation is a policy choice. Choosing to print money is choosing to make savers and wage earners subsidize asset holders. Choosing low interest rates is choosing to give borrowers, often the rich and corporations, cheap funding. Every monetary policy has winners and losers. You need to know which side you are on.

XVIII. The scariest part is that most people do not understand the mechanism. They think inflation is a "natural phenomenon". They do not know they are being harvested systematically. At 3% inflation compounded over 20 years, you lose more than half your purchasing power. Your money disappears quietly.

XIX. How do you cope? The only way is: convert cash into assets. Holding cash means standing at the bottom of the Cantillon chain, waiting to be harvested. Holding assets, property, stocks, commodities, means moving upstream. But that requires surplus cash to invest. If your income only covers survival, you are trapped at the bottom. Inflation is a tax on the poor.

XX. "Money loses value" sounds abstract. Let me make it concrete: the 100,000 in your bank today may have only 60,000 to 70,000 of purchasing power left in ten years. In thirty years it may have only 30,000 left. You did not spend the money, yet two thirds of it vanished. Whose pockets did the newly printed money go into? Into the pockets of those who received it first. That is not you. In the AI era, this process only accelerates.