The function of money is to change hands, but if it always changes hands in the same direction, eventually one party becomes poor and the other rich. A family that spends money also needs to earn money for its own economy, and this same principle applies on all scales: whole nations that consume more than they produce can become impoverished. What are the forces that cause wealth to move? Would those forces be different in a scenario where Bitcoin plays the dominant role instead of the dollar as the world’s reserve currency?

Although money is transferred from buyers to sellers in discrete transactions, if we “zoom out” to look at the big picture, the movement of money appears to be fluid. It flows regularly from buyers to sellers who in turn become buyers to different sellers—in an endless circulation of value, much like how the varied currents in the ocean are always churning.

In the natural world, however, gravity ensures that water doesn’t “pile up” in any one location—like money sometimes does.

The Expansion-Contraction Cycle

Probably the most significant artificial mechanism contributing to the transfer of wealth in modern times is the inflation of the money supply. By expanding the money supply, central banks enable the economy to thrive. However, more money going into the economy has two notable side-effects:

  1. The expansion of the money supply causes a latent debasement of the existing money.
  2. The new money is generally funneled through channels that meet designated criteria, which means only certain organizations get the biggest benefit. This is known as the Cantillon effect. Only if you own or work for one such organization do you directly benefit.

Both of those points contribute to decreasing the wealth of everyone, meanwhile increasing the wealth of those select organizations that meet the criteria for receiving the new money.

Adding an abstract face makes this meme timeless.

Next, when policymakers switch to a tightening phase after a time of monetary expansion, it serves to offset some of the debasement of the currency, but since the monetary tightening does not happen along the same channels as the monetary expansion, it serves to “bake in” the shift of wealth that happened during the expansion phase. Those who got poorer will suffer even more during the tightening, while those who benefited during the expansion phase will be better positioned. As this cycle of financial loosening and tightening repeats over and over again, monetary value is ratcheted out of the pockets of neutral people and companies and into the coffers of those corporations that align themselves with the policymakers.

Do you think the ocean-stream analogy could be extended to include the garbage patches that are formed by the currents? The oceanic currents are predictable general forces that influence bits of trash here and there to move in a particular direction till they converge in specific places.

This reflects how money tends to pool toward certain accounts. In fact, the more rubbish is thrown on top of the ocean, the more it piles up in those hideous patches. One upside to this convergence of flotsam is that it makes cleanup easier, as task forces can concentrate efforts on the most offensive areas.

How Is Bitcoin Different?

The key characteristic of fiat currency that makes it possible for policymakers to use it to accomplish national economic objectives is the ease with which its supply can be expanded and contracted. This is also a characteristic of every emerging government-issued digital currency around the world (and virtually every altcoin).

By contrast, Bitcoin has a fixed cap which means that in a world where Bitcoin in its steady state is the dominating reserve currency, the money supply would not expand. However, there would still be a ratcheting effect—in the opposite way—for two reasons:

  1. Bitcoin that is taken out of circulation by hodling (holding) or by loss effectively reduces the total supply. This has a latent deflationary effect, which means the effective value of the remaining money in circulation will increase over time. This would benefit everyone in proportion to how much bitcoin they hold.
  2. Wealthy entities that spend Bitcoin that was previously held would be introducing money into circulation, which would most benefit those who are most directly working to earn that money, exhibiting something similar to the Cantillon effect (but without the negative effects).

Those two mechanisms can be compared and contrasted to the mechanisms involved in fiat money redistribution, but they work in a more satisfying direction.

Point 1 in the Bitcoin world is opposite of point 1 in the fiat world: instead of wealth being regularly siphoned away from everyone by expansion of the money supply, wealth can only be bestowed to everyone by contraction of the total money supply.

Point 2 in the Bitcoin scenario is almost identical to point 2 in the fiat world: in either case, those who work downstream of where the wealthy choose to spend their money will be the beneficiaries. This time, however, it is not at the expense of anyone else. In end effect, whether wealthy Bitcoiners hodl or spend, those who work the best and save the most are the most benefited, just like in the gold ol’ days (before rampant inflation).

Final Thoughts

Money will always be in a continual cycle of redistribution, but the forces that move the wealth around are characteristic of the monetary system itself. The fiat monetary system—with its characteristic inflationary properties—lends itself to siphoning value from everyone to support those who are most effective at shoving their way onto the teats of big finance, whereas the Bitcoin system—with its hard cap—tends to confer more value to those who do valuable work and don’t waste what they earn: those who are most deserving and conserving of it.

To put it back into the language of oceanography, the currents of Bitcoin are tending to dissipate the wasteful wealth that has become concentrated in a few cesspools and spread it back out over the waters. Industrious, creative, hardworking people have an opportunity to transform the former rubbish money into precious sparkling gems of value, each person in their own way according to their individual talents.

Have you started transforming your part of the world with Bitcoin? There’s never a better time to begin than now.

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