Is America Entering the Late Stage of a Cantillon Cycle?

Opinions and editorials are strictly the views of the author and do not reflect GDP Dynamics.

The typical American is experiencing an economy that isn't performing well for them. The Michigan Consumer Sentiment Index was 51.7 in August, compared with 89.8 ten years ago. In 2024 CNBC reported survey results from Affirm showing roughly 3 in 5 Americans believed that the economy was currently in a recession. Pew Research Center reported in July this year that only a quarter of Americans rated the economy as good or excellent, with 41% saying "only fair" and 35% describing the economy as "poor". At the same time the GDP Dynamics Goodwin Business Cycle Model shows the economy has been in the expansion quadrant for the last 21 quarters, and the machine learning forecast shows no sign of that changing in the next 4 quarters. The S&P 500 is up over 80% from Q1 2021.

How does an investor understand this economy, and the diverging financial fortunes of asset owners and wage earners? We could assume that people are just under the wrong impression; they don't realize that their economy is dramatically improving. I don't think that's the case. I interpret these diverging trends as an indication that the US economy is approaching the late stage of its Cantillon cycle.

Writing 300 years ago Cantillon set out a cycle that plays out in an unstoppable fashion as a manufacturing country rises to great wealth, then indulges in luxury, and then falls back into poverty. The cycle tracks the changing fortunes of the worker, and how their plunge into luxury brings about their own change in fortune. At the beginning of a cycle workers produce export goods, either of high quality or low cost, that are in high demand across the world. These exporting producers are close to the source of the new money as it pours in from foreign nations, and are able to increase their spending and improve their standard of living.

The US economy started out in the current modern era as a manufacturing superpower. Wage-earning working people were producing the world's greatest goods and shipping them out there, and the world's money was flowing into the nation. To gain a rough estimate for when the peak occurred in the US Cantillon cycle and when the typical US worker was able to secure the highest living standards, let's imagine paying our workforce in ounces of gold rather than US dollars as a more stable metric over the long term. US median hourly wages in gold terms peaked in 1970 and have over the decades since then suffered a dramatic collapse. 12 hours of work per ounce of gold in the early 1970s to over 100 hours of work today.

The extreme change in fortunes that the workers experience in such a nation, is explained by two fundamental underlying economic forces discovered by Cantillon. The first is rising prices in the nation. As those people with first access to the new money expand their living standards it drives up the cost of living throughout the economy; Cantillon says "there is no clearer indicator of the amount of money in circulation than that of the landlords' leases and rents". Here he is telling us that as a nation gets more money in circulation, the cost of land and rents will increase and that's a useful proxy for the cost of living.

The second force acting against workers is that as they are required to charge higher wages to keep up with higher living costs their wages become easier to undermine by foreign imports (these days we could also include outsourcing and technology to that). Cantillon says this about land prices and I take it as a useful proxy for more general consumer prices "The dearness of land and labour in a State where money is abundant changes the proportion of things, and forces the State to draw from foreign parts its manufactures and the products of the earth, while its own artisans and inhabitants are forced into idleness or to go elsewhere." and also "The abundance of money which has made the State flourish will plunge it back into poverty by the high price of its products and the dearness of its manufactures, which have given foreign nations the means to supply their goods cheaper and better, and to ruin the manufactures of this State.".

These two forces have trapped American workers between falling wages and rising living costs. Wages fell from their 1970 peak as they have been undermined by foreign imports, outsourcing of service sector roles and labor replacing technology. US house prices hit record highs in real terms in 2022 which is a useful indicator of living costs. It's almost impossible to prevent these forces from acting out, as The Essay explains "The Wealth acquired by a State through Trade, Labor and economy will plunge it gradually into luxury. States who rise by trade do not fail to sink afterwards. There are steps which might be, but are not, taken to arrest this decline." It would require either the government to prevent or the working people themselves to resist the temptation to increase their standard of living and plunge into luxury. This goes against human nature and will never be possible. Cantillon has this to say "When a State has arrived at the highest point of wealth... it will inevitably fall into poverty by the ordinary course of things. The only way to prevent this plunge would be for the Prince or Legislator to withdraw money from circulation, keep it for emergencies, and try to retard its velocity".

The covid pandemic has rapidly accelerated this cycle, by acting as a huge transfer in wealth from the government to property owners. This dramatically increased wealth inequality, as the government issued new money into the system which ended up, through one way or another, in the hands of property owners with their independent source of wealth and inability to spend during lockdowns.

This helped wealth consolidate, and as wealth consolidates it pushes up demand for assets and the prices thereof. Simply because property owners with extreme wealth will tend to spend a higher relative amount on assets and a lower relative amount on consumption. Compare that to the other extreme, a large number of subsistence workers who spend every cent on consumption and have nothing left to spend on assets.

This accelerated the Cantillon cycle by further weakening the position of workers and wage earners by increasing asset prices and reducing the relative power of wages. This presented itself very clearly in the form of a catastrophic cost of living crisis, but high inflation rates obfuscated the underlying picture of falling wages relative to assets.

In contrast to this President Trump's Liberation Day Tariffs worked to slowdown and even possibly reverse the Cantillon cycle, as domestic manufacturing did show signs of increasing. We can theorize from previous principles discussed that tariffs would be inline with Cantillon's recommendation that money be removed from circulation to slow the decline. Tariffs specifically target and remove money from circulation that is being spent on exactly the imported luxury that causes the cycle. In effect an import tariff policy does inflict a lower standard of living on domestic workers, which is a painful experience in the short term but would, if followed through, be extremely beneficial in softening or preventing the Cantillon cycle in the long term. Unfortunately the policy has not been in place long enough or hard enough to make any significant difference on how the US Cantillon cycle is playing out.

While this cycle has been weakening the relative position of workers in the US economy it is strengthening the position of property owners. They are able to benefit from an environment of lower wages, as shown by record US Corporate profits in Q2 while labor's share of US GDP has fallen to historic lows.

So we have discussed why the US economy may be approaching the late stage of the Cantillon cycle, but if it truly were what could we expect to observe today based on Cantillon's work? We would see industry hollowed out, as consumers buy cheaper imported goods. We would see a reversal in the trade balance, as a once great manufacturing power able to maintain a balance of trade against its competitor nations would instead begin to run a trade deficit. We would see a flow of money leaving the nation which increases over time, and we have done since around the mid 1970s. We haven't yet seen mass unemployment however we have seen the degradation of the labor market, particularly for new graduates where underemployment rates can be over 40%. I conclude that we are seeing the later stages of a Cantillon cycle in the US economy which peaked around the 1970s.

My predictions for the US economy in the decades ahead. I expect the flows of money leaving the US to continue to increase in accelerating fashion, to the point where the dollar will lose much of its value and eventually in many decades' time be unable to fulfill its role as a reserve currency. Not because of a lack of liquidity, quite the opposite, but because it will become unacceptable as payment. The level of unemployment or underemployment I predict to also increase significantly. Workers will struggle to meet the cost of living and many will be persuaded to leave the nation for better opportunities, those that stay will suffer, but property owners will continue to benefit from rising asset prices and falling wages.

The dichotomy in fortunes between the working class and the owning class will become so wide, that they will exist in two separate economies. The wedge of luxury consumption will drive ever deeper splitting them apart. Today there is still a non-zero chance to make the transition from working class to owning class by embracing Cantillon's message and refraining from luxury consumption for those who dare.