New money enters the economy through central bank liquidity and commercial bank lending, primarily benefiting those closest to the source—banks and asset owners—before its purchasing power is diluted. This process, known as the Cantillon Effect, explains why asset prices (stocks, real estate) skyrocket while wages lag, systematically widening the wealth gap through a mechanism of "delayed leakage" rather than a "trickle-down" effect.
The Invisible Pipeline
You’ve felt it. You work harder, your LinkedIn profile
is a polished monument to productivity, and your "side hustle" is
finally generating revenue. Yet, the finish line keeps moving. Every time you
save enough for a down payment, the house price jumps another $50k.
The official narrative tells you that the economy is
"strong" because the GDP is up. But if the economy is so healthy, why
does it feel like you’re running up a down-escalator?
The answer isn't a lack of effort. It’s a lack of
proximity. To understand why your bank account feels stagnant while the markets
feel manic, you have to ignore the jargon and look at Monetary Flow.
Money doesn't "trickle down." It pools, compounds, and calcifies at the source.
The 5-Layer Monetary Flow Model™
To navigate this system, you need a mental map of how
money actually moves from a digital entry in a central bank ledger to the price
of your morning coffee.
1. Creation
Money isn't "printed" anymore; it’s typed
into existence. Central banks like the Fed or the ECB expand their balance
sheets to buy government debt or provide liquidity to private banks. This is
the Genesis Point. At this
stage, the money has maximum purchasing power because it hasn't interacted with
the market yet.
2. First Capture
The "First Responders" to new money are
always the big players: primary dealers, investment banks, and massive hedge
funds. They get the "fresh" money at the lowest possible interest
rates. They aren't buying groceries with it; they are buying yield-generating assets.
3. Asset Absorption
This is where the flow hits a dam. Instead of moving
into the "real economy" (wages and consumer goods), the money stays
in the financial system. It flows into stocks, commercial real estate, and tech
valuations. This creates Asset
Price Inflation. If you own the assets, you feel rich. If you’re trying to
buy them, you’re being priced out in real-time.
4. Delayed Leakage
Eventually, the money "leaks" out. It shows
up as corporate bonuses, dividends, or government spending. By the time this
money reaches the freelancer or the knowledge worker, it has already been
through three or four hands.
5. Inflation Realization
By the time the new money hits the "Main Street" economy, prices for services and goods have already adjusted upward to account for the massive amount of new currency in the system. You get the money last, but you pay the "inflation tax" first.
Why the "Cantillon Effect" is Ruining Your Retirement
In the 18th century, Richard Cantillon observed that
the person who lives closest to the king (the source of money) gets the most
value from it. Those at the edges of the kingdom receive the money only after
prices have risen.
In 2026, the "King" is the central banking
system.
When the Fed lowers rates or engages in Quantitative
Easing (QE), they are essentially handing a megaphone to the wealthy and a
blindfold to the working class. As Lyn Alden often points out, when the fiscal and
monetary taps are open, the "liquidity" doesn't distribute evenly. It
flows into the pockets of those who already have the infrastructure to capture
it.
·
The Asset Holder: Sees their $1M portfolio turn into
$1.5M without lifting a finger.
·
The Wage Earner: Sees a 4% raise while their rent
increases by 12%.
The math is brutal: You cannot out-earn a debasing currency through labor alone.
The Great Disconnect: Why Headlines Lie
We are taught to worship the CPI (Consumer Price Index) as the ultimate barometer
of "cost of living." But the CPI is a curated basket designed to
minimize the appearance of inflation.
It tracks the price of eggs and Netflix subscriptions,
but it does a poor job of tracking the things that actually build generational
wealth:
·
Prime real estate
·
Quality education
·
Healthcare
·
Equity in top-tier companies
If your "basket" includes a mortgage and a brokerage account, your personal inflation rate is likely double or triple the "official" stat. This is why you feel broke despite a "strong" economy. The things that make you a consumer stay relatively cheap; the things that make you a capitalist become prohibitively expensive.
Who Benefits When the Rules Change?
When interest rates shift, the flow direction changes,
but the winners rarely do.
When rates are low, the "cheap money" fuels speculative
bubbles. Venture capital pours into companies with no path to profitability,
and "Investors-lite" see their crypto or tech stocks moon.
When rates are high, the flow tightens. But here’s the kicker: large
corporations and the ultra-wealthy often have "fixed-rate" debt
locked in for a decade. The small business owner or the freelancer with a line
of credit or a floating-rate mortgage gets crushed immediately.
Mohamed El-Erian frequently discusses this "fragility." The system is built to protect the nodes of the flow—the banks—because if they fail, the entire plumbing system clogs. Your personal finances are, unfortunately, a secondary concern.
Stop Being the "Last Mile" of Money
If you are a founder, creator, or knowledge worker, you
are likely at the "Inflation Realization" stage of the 5-Layer Model.
You are receiving currency that has already lost its "edge."
To survive the next decade of monetary volatility, you
must move up the flow.
1.
Stop
Saving Currency, Start Acquiring Assets: Cash is a melting ice cube. It is
a medium of exchange, not a store of value. Convert your excess labor into
"hard" assets that the 5-Layer Model naturally inflates.
2.
Understand
Credit Creation: In our system, money is debt. When a bank gives you a
loan, they are creating money. If you use that debt to buy a depreciating asset
(a car), you’re a victim. If you use it to buy a cash-flowing asset (a business
or rental), you’re using the system’s own mechanics to your advantage.
3. Watch the Liquidity, Not the News: Ignore the "unemployment" stats. Watch the Fed Balance Sheet and the Reverse Repo Facility. When liquidity enters the system, asset prices will rise regardless of how "bad" the world looks on the evening news.
The Brutal Reality Check
The economy isn't a "tide that lifts all
boats." It is a hydraulic system.
The pressure is highest at the source, and by the time
the water reaches the end of the line, it’s a mere trickle. If you stay at the
end of the line, you will spend your life wondering why you’re still thirsty
while those at the source are drowning in excess.
You don't need a PhD in Economics to see the truth. You just need to follow the flow. The system isn't broken; it’s working exactly as designed. The question is: which layer of the model are you standing in?
FAQ: The Questions the Banks Won't Answer
Why
doesn’t money reach regular people? Because money enters through credit
markets, not through distribution. To get the "new" money, you have
to be in a position to borrow millions or sell assets to those who can. By the
time it reaches your paycheck, it has already caused prices to rise.
Is
inflation really caused by wages? Rarely. "Wage-push" inflation
is a convenient scapegoat. The vast majority of modern inflation is a result of
an expanded money supply chasing a finite amount of goods and assets. Blaming
the barista for a 50-cent raise is a distraction from the trillions added to
central bank balance sheets.
Who benefits most from rate cuts? Entities with high debt loads and those who hold long-duration assets (like tech stocks or real estate). Rate cuts lower the "cost" of the money being created at the source, leading to immediate price appreciation in the Capture and Absorption layers.
Take Control of Your Flow
The "official" version of reality is designed
to keep you productive and passive. But once you see the 5-Layer Model, you
can't unsee it. You can no longer afford to be a passive observer of your own
financial life.
The system will continue to devalue your time. Your
only defense is to own the things the system is forced to pump.
Are you
ready to stop being the "last mile"?
[Join the
"Monetary Intelligence" Newsletter] to get weekly breakdowns of
where the liquidity is flowing and how to position yourself before the
"leakage" begins. Don't just work for money—understand the system
that creates it.
[Download the 5-Layer Monetary Flow Diagram] to keep this mental model on your desk as a reminder of the real game being played.
