Printed Money and Generational Phenomena

On almost any Saturday in the spring of 2021, an open house in Sunnyvale went something like this. The house was a three-bedroom ranch on a cul-de-sac, one of thousands put up in the late 1950s for the engineers and machinists of Lockheed's new missile division, and it had sold new for something under twenty thousand dollars. The listing asked a million and a half. Forty-odd couples filed through in an afternoon, opened the closets, stood in the yard looking at the lemon tree. By the offer deadline there were twenty, most of them well over asking, several waiving inspection, and the winner paid cash. Nobody there thought anything strange was happening. The agent called it the market. The buyers called it the comps. The couples who lost called it bad luck and drove to the next one.

None of them could see where the money had come from. In the twelve months before that spring, the Federal Reserve's balance sheet went from about four trillion dollars to more than seven. Each month it bought eighty billion dollars of Treasury bonds and forty billion of mortgage bonds, and the rate on a thirty-year mortgage fell below three percent for the first time on record. Over the same months the Nasdaq doubled from its pandemic low. A good share of the cash on the kitchen counter in Sunnyvale was restricted stock in companies a few miles away, worth twice what it had been a year before, for reasons that had little to do with anything those companies had made.

Cantillon on the rue Quincampoix

In 1719 Paris went mad over paper. John Law, a Scottish gambler who had talked his way into running the French royal finances, was issuing banknotes through his Banque Royale and using them to pump up shares in his Mississippi Company. The shares were traded in the street, in the narrow rue Quincampoix, where a hunchback was said to rent out his back as a writing desk. Prices rose twentyfold in a year. Then the paper outran any belief in it, and by the end of 1720 the shares and the notes were close to worthless.

Richard Cantillon, an Irish banker in Paris, made a fortune from it. He bought early, sold early, and moved his money into foreign currency before the collapse, and he spent years afterward fighting lawsuits from clients who thought he had done too well. Around 1730 he wrote down what he had watched happen. His Essai sur la nature du commerce en général, published two decades after his death, makes a point about new money that sounds obvious once said and is ignored nearly everywhere it applies. Money doesn't arrive everywhere at once. It enters an economy at particular points, in particular hands, and those hands spend it first, at the old prices. As it spreads, prices rise, first for the things the first holders buy, then outward. By the time it reaches the far edge, the people there face higher prices with incomes that never saw the new money at all. The first hands gain and the last hands pay, and the money was never handed out at random.

Cantillon died in London in 1734 when his house burned down, possibly set alight by a cook he had dismissed, possibly by someone else. His idea outlived him and acquired his name, the Cantillon effect, mostly among economists who mention it in passing before going back to averages.

Channels already full

Modern money creation is more orderly than Law's, but it enters the same way, through doors. When the Fed buys bonds, it buys them from a couple dozen large dealer banks and pays with new reserves. Bond prices rise and yields fall, and the investors who sold, with cash in hand and nothing paying interest, buy something riskier: corporate bonds, stocks, real estate, venture funds. The Fed had a name for this, the portfolio balance channel, and it was the point of the exercise. When the money reaches an ordinary person, it usually arrives as a higher price on something she already owns or a lower rate on a loan she already qualifies for. Someone with neither sees it last, as a higher rent.

In the United States the richest tenth of households owns close to nine-tenths of all stock. They are where the money lands first, not by anyone's malice but because that is where the pipes run. Water in a dry country follows the channels the last flood cut and cuts them deeper, so each flood runs more surely into the same beds. Mortgage bonds work the same way at street level. A lower rate does not create houses in Sunnyvale. It lets each buyer who already qualifies bid more for the same house, and the price absorbs the difference, so the subsidy ends up with whoever owned the house when it arrived.

None of this was secret, and very little of it was planned. That is the odd quality of it. In November 2010 Ben Bernanke, then chairman of the Fed, wrote in the Washington Post that buying bonds would lift stock prices, that higher stock prices would make consumers feel wealthier, and that feeling wealthier would lead them to spend. The mechanism was stated plainly. Who would own the higher stock prices was treated as a side effect, a question of "distribution" for Congress to take up if it chose. Each actor in the chain did what made sense in its own place. The dealer sold, the fund reached for yield, the bank lent against collateral that had risen in value, the engineer with stock options bid on the house. No one designed the outcome, and no one needed to. It came about the way a path comes about across a lawn, semi-consciously, each walker taking the shortcut worn by the walkers before.

Other countries took the same channels further. From 2010 the Bank of Japan bought stock index funds outright, and by 2020 it was the largest single owner of Japanese stocks, holding something like seven percent of the Tokyo market. In China credit ran through local governments and property developers into apartments, until a family's savings and a city's budget and a bank's balance sheet were all one bet on the price of a flat.

Idols of the marketplace

In 1620 Francis Bacon described the false images that govern human understanding. He called them idola, which English renders as idols or, closer to the Latin, phantoms. There were four kinds. The ones he thought most troublesome he called the idols of the marketplace, idola fori: notions formed in the traffic of people with one another, through the words they trade, which then turn around and rule the minds that made them. A phantom of this kind is not a lie. It is a pattern that arose from many people's dealings and comes to be taken for the way things are.

The phenomena of printed money are phantoms in exactly Bacon's sense. They arise from the flow, look like nature, and govern the lives of people who never chose them.

One is the ladder. A house, in the ladder's terms, is not a place to live but the first rung of wealth, and a person who doesn't get on early is left on the ground while everyone above climbs away. The ladder decides when people marry, whether they have children and how many, how far they drive to work, and whether they stay in a town their family has lived in for three generations. In the United States the median first-time buyer is now close to forty. Few of those buyers would say the Fed's mortgage purchases set the age at which they could start a family, and yet in the arithmetic of the ladder, they did.

Another is the runway. In the Santa Clara Valley a company with cheap capital behind it was expected to grow before it earned, buying customers below cost until rivals ran out of money. A founder's life was counted in months of runway, the cash left before the next round. A company that made a profit early looked unambitious, as if it had misunderstood the game. WeWork was valued at forty-seven billion dollars in 2019 on the strength of this phantom and was bankrupt four years later. The ones that survived set the pattern for a generation of engineers who never worked anywhere that had to pay its own way.

A third is the number, the line on a retirement statement that has to go up. It is the subtlest of the three, because it recruits the people the flow passes by. A nurse who rents, who will never catch the ladder and has never heard of a runway, has a retirement account in an index fund, and she cheers the same rising prices that push her rent up. The phantom gives everyone a small stake in the channel, enough to want it kept full.

Phantoms passed down

Bacon's idols were fixed features of the mind. The phantoms of printed money are generational. They form in one cohort's dealings and are inherited by the next as given conditions, the way a child takes the shape of the house she grows up in for the shape of houses.

A person born in 1990 entered the workforce when interest rates had been near zero for years and stayed there for most of the decade that followed. For her whole adult life, money was nearly free for those near the spigot and expensive for everyone else, and she has no memory of anything else. Her parents bought in the late 1980s for a price that seems invented now. To them the house is savings, the steady reward of a life of work. To her it is a wall. In Britain the "bank of mum and dad," parents funding their children's deposits, was at one point estimated to rank among the country's ten largest mortgage lenders. Inheritance has taken over the job wages once did, and the phantom passes down the family line with the house.

When rates finally rose in 2022, prices barely fell, and a new phantom appeared. Owners holding mortgages at three percent stopped selling, because moving meant borrowing again at seven. Couples whose children had left stayed in four bedrooms, and young families stayed in two. A rate set in 2021 now decides who lives where, years after anyone remembers setting it.

In China the response has a name. In 2021 young people began talking about tang ping, lying flat: declining the race for the apartment, the marriage it was supposed to secure, and the overtime that paid for both. It was a refusal of a phantom, made by people who had concluded they couldn't reach the thing it promised. Japan had a word for something similar a decade earlier, the satori generation, enlightened in the sense of no longer wanting what was out of reach.

The phenomena are generational in a second sense too: each one generates its successor. Once asset prices are collateral for the banks and savings for the households, a fall in them is a crisis, and the response to a crisis is to print. The rescue of 2008 made the rescue of 2020 both necessary and possible, and each one ran through the same channels as the last, deeper.

Paine and the assembly's paper

Pennsylvania argued over this in the 1780s. In 1785 the state assembly revoked the charter of the Bank of North America and set up a loan office to issue paper money, lent out on mortgages and made legal tender, so that creditors had to accept it at face value whatever it would actually buy. Thomas Paine, who had written Common Sense a decade earlier, took the bank's side. In his Dissertations on Government of 1786 he drew a line that this collection of essays has drawn again in Separation of Currency and State. A bank's notes, redeemable in coin and accepted by anyone who chose to accept them, were a convenience of trade. Paper issued by the assembly and forced on creditors by law was something else, a power to move wealth from one person to another by decree, and he thought it so dangerous that "the punishment of a member who should move for such a law ought to be death."

Paine's line still falls in the right place. Money that people take up by choice enters through trade, wherever trade happens, in small amounts at many points. Money issued by authority enters where authority stands, through the institutions closest to it, and spreads outward from there in Cantillon's order. The tools that might let money move outside those channels are still young, and Tallies and Tokens looked at how slowly that transition goes. The phantoms are older and better settled, and they have the advantage of looking like the world.

Back in Sunnyvale, one of the couples who would lose stopped on the way out at the kitchen doorway, where the first owners had marked their children's heights in pencil on the frame, 1958 to 1971. The sellers had painted every other surface in the house. The agent had asked them to leave that one alone. It helped the house sell.

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A note on how this piece was written: the idea that printed money runs down channels already full and leaves behind phantoms that rule ordinary lives is mine, as is the direction of the argument. The sentences were drafted with AI assistance from that direction, then edited by hand.