From cash to crypto: The Cantillon effect vs. the Nakamoto effect

A change in relative prices resulting from a shift in money supply is known as the Cantillon effect.

Initially defined by 18th-century economist Richard Cantillon, the Cantillon effect is a shift in relative prices caused by a change in the money supply. Making a large amount of cheap money available through banks does not guarantee that the demand for everything will rise simultaneously. Instead, history demonstrates that certain assets outperform others, resulting in price increases in some sections of the economy while prices decline in others.

The central bank’s attempt to stimulate the economy may not only fail but instead result in a spike in the cost of living as raw material and consumer basic prices rise, comparable to stagflation’s impacts.

The Cantillon effect is a method of levying an additional tax on anyone who earns a “sticky” wage or has a large portion of their wealth in dollars. This tax rewards people who invest in financial assets or work for the government as preferred contractors. Bitcoin as an investment separates the creation of new money from politics, which makes it far more equitable. But how does the Cantillon effect work?

According to the Cantillon effect, the first recipient of a new money supply has an arbitrage chance to spend money before prices rise. This is partly because new fiat money is created at near-zero cost and distributed to particular parties, most commonly banks. These banks can use this money to buy products and assets whose prices have not yet risen due to the increase in the money supply. 

As a result, banks can purchase items at a reduced price. Therefore, individuals and institutions with the closest ties to the central bank — banks and asset owners — are given financial advantages at the expense of those with the fewest links to the financial system. Understanding the Cantillon effect provides that inflation can be viewed as a government-imposed non-legislative and regressive tax on citizens’ purchasing power.

Unprecedented actions by the central banks and governments of the world’s major economic powers enrich the wealthy while further impoverishing the poor. The famed Cantillon effect lurks underneath this reality, and Bitcoin is the ultimate remedy.

To grasp how Bitcoin alleviates inequity, consider how fiat currencies such as the dollar are allocated now and how fresh Bitcoin is issued.

Almost all of the fiat currency currently issued goes to banks and the government first. This is the case because central banks like the Federal Reserve back big commercial banks like JP Morgan and Citi. Central banks have “printing presses,” that allow them to “print” (or digitally add) a limitless number of their own fiat currency into circulation. 

They also impose rules on commercial banks to encourage them to lend more or less money, increasing or decreasing the total money supply. Because banks and the government are the first to get additional money, they determine who is second in line to profit from the Cantillon effect. 

This is when lobbying and the influence of being well-connected to the financial elite come into play. Lobbyists ensure that their clients profit from the Cantillon effect, which allows the super-rich and corporations to obtain loans from banks at extremely cheap interest rates. 

The Bitcoin system eliminates lobbyist influence and the benefits of knowing the right banker, putting everyone on an equal footing. Every 10 minutes, every miner on the Bitcoin network has an equal chance of winning a reward of newly produced BTC.

Anyone may become a miner by simply connecting a computer into a wall socket, which is significantly less time-consuming than petitioning elected officials for a government contract. Miners spend a lot of money on electricity to fight for the reward, and they provide the Bitcoin system with a much-needed service: security. The Bitcoin system would not work without miners.

Of course, policymakers may influence the Cantillon effect by altering how new money enters the system. However, this does not address the underlying issue: someone benefits at the expense of someone else. The Bitcoin system is significantly more equitable because it employs the Cantillon effect to appropriately reward people who perform a valuable service for everyone else: network security.

This content was originally published here.


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