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Bitcoin, the solution for the Cantillon effect?

September 3, 2020

The beginning

When Satoshi Nakamoto published the Bitcoin whitepaper just a month and a half after the Lehman Brothers bankruptcy and the day some are looking at the start of the 2008 crisis, few people gave enough importance to this new electronic money system that it should work from user to user without the need for an intermediary. However, 12 years after the publication of Satoshi Nakamoto, Bitcoin has grown from an idea explained in 9 pages to a global phenomenon that for some is synonymous with hope and a peaceful revolution in which we can all participate.

Although there is still a debate about Nakamoto’s true intent in creating Bitcoin, I understand that his main motivation was to propose an alternative to today’s economic and financial system. The evidence of Satoshi Nakamoto’s motivation and his dissatisfaction with the actions of the central banks lies right in the Genesis block of Bitcoin (first block of the Bitcoin blockchain). In this block, which was dismantled on January 3, 2009, Satoshi Nakamoto wrote “The Times 03 / Jan / 2009 Chancellor on the verge of the second bank bailout” which in Spanish “The Times 03 / Jan / 2009 Chancellor on the verge of the second Rescue “means to the banks”.

Bitcoin, the solution for the Cantillon effect?Bitcoin, the solution for the Cantillon effect?

Image in contrast to the cover of the renowned English publication The Times and the information in Bitcoin’s Genesis block

In my view, the fact that Nakamoto put this short text in the first bitcoin block is in itself a protest against the way central banks manage their monetary policy and spend money indiscriminately to bail out the banks. at the expense of harming the majority of citizens. If you don’t understand right now why spending money (also known as printing money) to bail out banks is against the interests of society, I’m sure by the end of this article that it will be very clear to you.

inflation

The word inflation is one of the most well-known and most discussed economic terms in the world, not only in academic settings but also in everyday life for ordinary people. While there is a common understanding of the meaning of inflation, not many people know that this word can have different meanings depending on the context and / or the person using it.

In general and for Keynesian economists Inflation is an economic phenomenon that refers to the increase in the prices of goods and services in the market over a period of time. In other words, inflation can be thought of as the loss of the purchasing power of money over time. These two definitions explain exactly the same phenomenon, since an increase in the price of goods and services represents a decrease in the value of money. Assuming a fixed amount of money, I can buy fewer things today than 2 years ago and much less than 10 years ago.

For fans of the Austrian business school Inflation represents the increase in the amount of money in the economy. In other words, for Austrian economists, inflation is a measure of the new amount of money that the central banks have spent in relation to the total amount before that issue. For example, if the total money in the economy at the beginning of a period is one hundred million dollars ($ 100,000,000) and the central bank prints ten million dollars ($ 10,000,000) in that period, inflation for Austrian economists in that period had been 10 % ($ 10,000,000 / $ 100,000,000).

The Cantillon Effect

While studying business cycles in the 18th century The economist Richard Cantillon recognized that central bank printing of money did not affect everyone equally. Cantillon mainly noted that when the central banks issued new banknotes, they were not evenly distributed in society and that some individuals and organizations got that money first. Because of this situation, the companies that received the money first were the companies that were closest to the central bank compared to the other companies that received the money later due to the exchange of goods and / or services in the market, in an advantageous position. .

When we combine the situation described above with the effects caused by inflation, we find that the companies closest to the central bank benefit from receiving the money before prices rise in the economy. On the other hand, firms that are further away from the central bank and therefore receive the new money long after it was issued are harmed by receiving money that has depreciated since commodity prices and services in the market have increased as a result of inflation.

In the current context, it is no secret to anyone that the world’s major central banks, led by the Federal Reserve in the United States and the European Central Bank in Europe, have been printing money indiscriminately for practically all of 2020. This money, which central banks print, is mainly used to fund governments, finance banks, and rescue some of the largest corporations in the world. In addition, it should be noted that this money is “loaned” at very low rates, and in some cases even at negative rates.

While governments, banks, and large corporations can get the money just printed by central banks at ridiculously low interest rates, it will be several years before individuals and small businesses see that money. To do this, governments, banks, and large corporations must first pay their employees and distribute benefits to their shareholders (although I understand that governments don’t).

After this, Banks can start lending money at higher interest rates (since, like all businesses, they need to make a profit or gain from their operations), companies can start paying their suppliers, and thus the money starts flowing into the economy.

Although this may seem normal, The truth is that those who get the money first can choose where to spend that money and when to spend it as it is not common for them to spend it right away. This way, those who get the money first can buy assets and / or invest before prices go up, while those who get the money last can only buy with that money that has depreciated over time.

And we’re going back to bitcoin

In contrast to central bank monetary policy, in which some decide how much money to print, when to print and who to give it to, Bitcoin has a fixed emission curve that is determined by mathematical code and that no one can change at will. In Bitcoin we all know that at the beginning 50 BTC were generated per block and that on average one block is mined every 10 minutes. Also, We also know that the issuance of new BTC is halved every 210,000 blocks. After issuing 50 BTC per block, 25 BTC was issued per block, then 12.5 BTC per block and now 6.25 BTC per block.

Perhaps the most interesting thing about the Bitcoin Emissions Policy, however, is that the new BTCs issued by the protocol are not being distributed among Satoshi Nakamoto’s friends or those closest to the Bitcoin developers. No. The new BTCs issued by the protocol will be distributed in a fair and well-known manner to the miners around the world who work on their computing power 24/7 to keep the network safe. And the best part is that anyone looking to mine Bitcoin can enter a global competition to benefit from the network’s new BTCs.

Conclusion

Despite the fact that we have been living in a government-controlled world for many years where central banks have the power to manipulate monetary policy at will to help those who want it, there is an alternative system today in which this is not possible. With the birth of Bitcoin, Satoshi Nakamoto showed us a different way. He showed us that it is possible to use a system in which we all have the same opportunities and no one can use their contacts to benefit from the issue of new money.

Today Bitcoin is positioning itself as an alternative to the current currency system. With its fixed and transparent emission policy, Bitcoin represents neutral, apolitical and fairer money than current money. I don’t think the central bank money is going to go away anytime soon, but like 2009, Satoshi Nakamoto raised a voice of protest by adding the Times front page to Bitcoin’s Genesis block. Today I raise my voice of protest by using bitcoin as money over the corrupt central bank money.

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