Who Gets the New Money First

People keep asking where all the printed money goes.

The way it’s normally asked hides the answer. New money doesn’t get used up like fuel. Every new pound that exists is in someone’s hands right now. So there are two questions underneath that one. Who gets to spend the new money first? And whose pounds quietly shrink to pay for it? Answer both of those and you’ve answered it.

New money enters the economy through a few specific doors, mostly bank lending and central bank purchases of bonds.¹ Because of where those doors are, the money lands in financial markets and property first. It pushes up the prices of the things people use to store wealth, houses and shares above all.² Only later, after it has passed through many hands, does it reach wages, and by then prices have already moved. So the printed money goes into asset prices, and the value it carries comes out of wages and cash savings. It’s a transfer, and nobody posts you the bill. The bill arrives as prices.

How the money is actually born

Almost none of it is notes from a printing press.³ It’s created in two main ways, and the door it comes in through decides who gets it first.⁴

Banks create money when they lend.⁵ When a bank gives you a £300,000 mortgage, it doesn’t move some saver’s money into your account. It creates a brand new deposit that didn’t exist the day before. Most money in the economy was born this way, and in Britain lending against houses is the largest single kind of bank lending, the door that stays open in every year.⁶ That’s your first clue about where it all goes.

In a crisis, and well outside one, the central bank creates money directly.⁷ That’s quantitative easing, the central bank creating new electronic money and using it to buy bonds.⁸ The Bank of England creates the money and buys government bonds from big investors such as pension funds and insurers. Those investors now hold cash they didn’t plan to hold, and from 2009 to 2021 it paid them almost nothing.⁹ The first thing that cash buys is corporate bonds [loans to companies].¹⁰ And when the Bank’s buying leaves government bonds paying less, a company’s future profits and a flat’s future rents are worth more today, because the safe return that money could get instead has fallen. So share and property prices rise over the same years.¹¹ The companies that sold those bonds have borrowed the cash cheaply, and much of it goes on buying back their own shares or buying rivals. So the new money still reaches shares, one hand later. The new money’s first stop is financial markets because that’s where it was delivered.

There’s a third door, government spending funded by borrowing that the central bank then buys up. Furlough and the Covid support went through it. In crisis years more new money comes through that door than through bank lending, and in 2020 and 2021 far more. Of the three, it’s the one that points at ordinary spending. It’s why 2021 and 2022 finally saw shop prices jump after a decade in which people kept asking why all the money creation hadn’t caused inflation.¹² It had. When the new money went to markets, asset prices rose. When it finally went to households, food and energy prices rose.¹³ Blocked supply chains, and then the price of gas, pushed in the same direction.¹⁴

Why first in line wins

Whoever receives new money first gets to spend it at today’s prices. This has a name, the Cantillon effect. The people closest to new money benefit at the expense of the people furthest from it. It’s the heart of the question. The order of arrival decides who wins.

The bank funds itself at the Bank of England’s rate or cheaper and buys assets at today’s prices, and the money it creates when it lends goes into a house at today’s price. The pension fund that sold its bonds buys corporate bonds at today’s prices.¹⁵ The company that sold those bonds buys a competitor, or buys back its own shares. Each hand the money passes through bids prices a little higher. The effect takes roughly a year to eighteen months to show up, and it shows up in whatever the money is being spent on.¹⁶

In an ordinary year most of the new money is being spent on assets, so asset prices move first. Wages are behind all of it, so by the time a receptionist’s pay review comes round, her rent, her food, and her energy have already gone up. She gets a 3% rise and an 8% rise in the cost of living. Nobody took a pound out of her account. The transfer happened entirely through prices. The decision behind it is on the record, the Bank of England has published an estimate of who gained from its own bond buying, and the official statisticians publish how much faster prices rose for poorer households when food and energy led the rise.¹⁷ But no record joins those halves or calls the result a transfer, so the person who paid is never shown a bill.

Rising prices and falling real wages are the same event seen from two seats. The receptionist’s wage fell behind because the new money reaches wages late. The gap is where the new money’s buying power came from.

Where it settles

Follow the chain far enough and the money pools in whatever people use to store wealth. Houses most of all.¹⁸ Banks lend new money into property, and when cash is losing value, people park their wealth in things that are hard to make more of. So a house takes on a second job. It’s shelter, plus a savings account. The extra price it carries for that second job is called a monetary premium, the part of its price that comes from people using it to store value rather than to live in it. Decades of money creation are stored in that premium. It’s a big part of why a house in Britain costs a far higher multiple of a salary than it did a generation ago, even though technology has made most goods cheaper to make.¹⁹

Between 2000 and early 2018 the world added roughly 185 trillion dollars of new debt and got roughly 46 trillion dollars of growth for it. That’s about four dollars of new debt for every dollar of new growth, and each new dollar of debt produces less new output than the one before. The gap went into raising the price of things that already existed, houses that were already built, shares in companies that already traded, and into paying the interest on the debt from earlier rounds.

Part of the state’s funding runs through the third door too. In 2019 every American corporation together earned about 2.4 trillion dollars in profit before tax, while in 2020 alone America’s stock of money grew by about 3.7 trillion dollars.²⁰ You could have taxed away every dollar of every corporate profit and not matched the newly created money. In Britain’s crisis years the gap between what the state spent and what it raised in tax was bridged mainly by new money, because the Bank of England bought government bonds on a scale close to the whole of that gap. Across the years since 2009 most of the gap was bridged by selling debt to savers, and the Bank has been selling its holdings back since 2022. The part bridged by new money is paid for through prices, and it passes no vote. The part bridged by borrowing is paid for through prices too, in part. That’s because for most of those years the interest that the lenders were paid was held below the rate prices rose, so the savers who lent were paid back in pounds that bought less.

Since the question is where it all goes, some of it goes abroad. This is strongest for the dollar, because the world holds and trades in it.²¹ The world’s demand for dollars spreads the cost of new dollars across the savings held in them, so the pressure shows up in weaker countries’ currencies and import bills before it shows up in American shop prices.²² Part of the bill for a reserve currency’s money creation is paid by people who never saw any of the money.

What the order of arrival explains

Inequality stops looking like a fault in the system and starts looking like the delivery route. The system moves buying power from late receivers to early receivers every round. Skill matters, but the gap between asset owners and wage earners widens on its own, by place in the line. The order of arrival also explains why so many people now feel forced to invest. When money loses value year after year, a saver has to take risk just to stand still. And each crisis needs a bigger dose than the last. Technology keeps pushing down what it takes to make things, and the debt piles higher with every round. That debt is fixed in pounds, and what it can’t take is a sudden fall in the prices credit pushed up, houses first. So every time a sudden fall in the prices credit pushed up threatens, the system is rescued with new money, and the rescues keep getting bigger.

What people say back

“It paid for furlough and hospitals.” Some of it reached people directly and it mattered. In 2020 and 2021 more new money came through the government’s door than through bank lending. In an ordinary year the door that stays open is lending against houses, and the money it creates goes into houses first.²³ And even the part that reached households was paid for by shrinking every existing pound rather than by a tax anyone voted for.

“Wages catch up in the end.” Wages arrive late because of where the doors are, and that lag is the transfer. To catch up to prices that already moved is to arrive after the race has finished, and arriving later seldom restores what the gap took.

“My house went up, so I won.” Against a wage earner, you did, and that gain is real. What you can’t easily do is spend it.²⁴ You’d have to sell and leave the housing market altogether, because you still need somewhere to live and the house you’d move to inflated with it. Measured in houses you’re standing still, and your children buy in at the higher multiple of a salary that your gain is made of.²⁵ The number rose. What you can spend, while you still need a roof, mostly didn’t.

“Then tax the rich and claw it back.” That attacks the symptom while the tap stays open. As long as new money keeps entering through assets first, asset prices outrun taxes. Whatever a tax takes from the people who own assets, the next round of new money lifts their assets again and pushes up the prices everyone else pays, so the gap between asset owners and wage earners is rebuilt. That’s true however the tax is designed, because a tax attacks the effect, and the new money is the mechanism that keeps widening the gap.

The ruler moves too

The reason this is so hard to see is that we measure everything in the unit being created. The official measure of prices can tell you roughly how much the pound stretched against the goods it prices. What it can’t show you is how far those goods would have fallen under a unit nobody can expand, because it does all its sums in the same stretched pound. Flip the measurement to something nobody can make more of at will, and the picture turns upside down. Bitcoin is the first money that lets you flip it. Priced that way, and read across whole cycles of bitcoin’s own swings rather than year to year, the trend in houses and shares has been down for years. So the printed money went into the numbers. The value went from wages and savings to whoever stood closest to the door. And “everything going up” was mostly the ruler shrinking.