What is the Cantillon effect and its relationship with Bitcoin

Bitcoin has undoubtedly had an enormous impact on the traditional financial system, an impact that is even capable of counteracting one of the best-known financial and economic effects in the world: the Cantillon effect. For that reason, here we will explain what is the Cantillon effect, and how Bitcoin is related to it, while giving you tools to avoid the harmful effects of this effect within your finances, whether personal or business.

What is the Cantillon effect?

The Cantillon effect is an economic theory that describes how Inflation of the money supply affects different groups in the economy, generating inequalities in the distribution of wealth. This concept, proposed by the economist Richard Cantillon in the 18th century, is relevant to understand how the creation and distribution of new money impacts different sectors of society.

This theory explains that when new money is introduced into the economy, this new money is not distributed evenly. Instead, those who receive the new money first, such as banks and large financial institutions, benefit the most from having greater purchasing power before prices rise. For example, if a bank receives a newly created loan from the central bank, it can use that money to invest in financial assets before prices adjust to the increase in the money supply. As a result, these first recipients of the new money can obtain significant benefits through investments that are valued in currency terms before inflation influences prices.

On the other hand, those who ultimately receive the new money, such as workers and savers, experience a decrease in their purchasing power due to the increase in prices that results from inflation. This means that when prices rise as a result of the expansion of the money supply, the money these individuals have in their bank accounts or in the form of savings or salaries loses value in terms of goods and services. This can lead to difficulties in maintaining purchasing power and savings capacity, which can result in a negative impact on the quality of life of these individuals.

How is this effect manifested?

The above allows us to establish the process by which the Cantillon effect manifests itself, and we can mention the following points:

1. Monetary expansion: Central banks increase the amount of money in circulation, usually through asset purchases or money printing.
2. Early profit: Banks and financial institutions, which have direct access to central banks, receive the new money first.
3. Purchase of assets: The first to receive the money can buy assets such as stocks, real estate or any other valuable asset (e.g. Bitcoin) before inflation raises their prices.
4. Price increase: As new money circulates through the economy, the prices of goods and services rise.
5. Loss of purchasing power: workers and savers, who receive the new money in the end, see their purchasing power decrease due to inflation.

You may not be surprised by these effects, and in fact, you have probably seen and experienced them very clearly and directly. For example, the 2008 Financial Crisis, the same one that gave rise to Bitcoin, made it very clear to us the power of the Cantillon effect to make people lose purchasing power, while the big banks make real fortunes, or are rescued despite their bad actions. After all, during this event, central banks injected billions of dollars (and euros) into the economy, which benefited banks and investors, but also led to widespread inflation, which ultimately ended up affecting citizens. less wealthy.

The relationship between Bitcoin and the Cantillon effect

Of course, we learned something from that crisis: a tool was needed to prevent it from happening again. A tool that will enable people and those who were at the tail end of the Cantillon effect, to avoid its harmful results. This is what led to the creation of Bitcoin by Satoshi Nakamoto.

Let us remember that Bitcoin has a series of very clear economic rules, a limited issuance and a decentralized operating structure. All of these features directly influence Bitcoin's wealth redistribution, an element that counteracts the effects of money supply inflation that characterizes the Cantillon effect within the world of fiat money. Basically, Bitcoin is a huge countermeasure to the Cantillon effect and has proven this for the last 14 years of its existence.

Bitcoin: the solution to counteract the Cantillon effect of the fiat world

Think about it for a moment. What has been the evolution of fiat currencies and related economies from 2009 to the present day? Many economists will tell you that the global economy has grown a lot, that there are trillions in profit and that we are going at a good pace. However, if you go to the supermarket today, with a budget of €500, you are unable to buy the same or equivalent products that you would have bought 10 years ago.. It is clear that the Cantillon effect has decreased your purchasing power, that is undeniable, even if economists and the Central Bank of your country tell you otherwise, or blame others for said effect. After all, they see the overall number, a number that they have inflated themselves, but on a personal level, it has not benefited you at all, but quite the opposite: it has made you poorer.

Now, ask yourself: What has happened to Bitcoin in that same period of time? Well, 10 years ago the value of a BTC was about €580 and now it is around €49.000 (February 2024), that is a revaluation of more than 8400% in 10 years. The point is clear: the Cantillon effect in fiat affects you by causing you to lose purchasing power, making you poorer over time. While Bitcoin, contrary to all this, protects you from these effects.

And all this is made possible by Bitcoin for two things:

redistribution of wealth

Firstly, those who own Bitcoin may be less affected by the Cantillon effect, since the supply of Bitcoin is predefined and limited to 21 million units. This contrasts with the issuance of fiat currency by central banks, where money creation can disproportionately benefit certain groups in the economy.

For example, if there is an increase in the supply of fiat money, as a result of a central bank's expansionary monetary policy, the first to receive this money, such as banks and large financial institutions, can benefit by using it for investments before that prices rise. On the other hand, those who ultimately receive the new money, such as workers and savers, may experience a decrease in their purchasing power due to inflation and the depreciation of money due to the new issuance.

We can see real examples of this everywhere. For example, the inflation that economies such as the United States or the European Union have suffered after the pandemic (in 2020) so far. This is explained very clearly if we take into account the enormous monetary issue that the FED and the ECB carried out at that time. And the increase in the issuance of the dollar and the euro has had and will continue to have a profound impact on inflation until now.

Financial democratization

On the other hand, Bitcoin, being a decentralized digital currency accessible to anyone with an internet connection, can allow marginalized individuals and communities to access financial services without depending on traditional financial intermediaries. This can mitigate inequalities in wealth distribution by providing a more inclusive financial system.

Thus the relationship between Bitcoin and the Cantillon effect suggests that the adoption and use of Bitcoin can potentially counteract the inequalities generated by the Cantillon effect by offering an alternative to the inflation of fiat money and by promoting greater equity in the distribution of wealth. .

Conclusion

At this point it is clear that Bitcoin is an option that you should consider if you want to avoid the harmful effects of the Cantillon effect of the fiat world. After all, you can't compare fiat money and its constant devaluation with Bitcoin and its constant revaluation. There will be those who say that Bitcoin is a bubble, that it is a volatile asset (which it is), but even with these arguments they cannot refute a constant reality within this cryptocurrency: its constant revaluation over time.

When Bitcoin started it cost nothing, now a single Bitcoin is worth what a person earns in a year. And even when it is at its bearish moment, Bitcoin still has a higher net value than any other fiat currency (or financial asset). And all this, because Bitcoin does not follow the rules of the game of the traditional financial world, it goes at its own pace, marking its own path, and giving you an opportunity to escape from a system that little by little makes your finances and your pocket crunch.