What If Bitcoin was responsible for increasing inequalities in the world? What if instead of saving us all, Bitcoin would doom the late adopters and the one with little or no savings?
It seems obvious to me that over time, more and more Bitcoin will be accumulated in lesser and lesser hands. Let’s try to better understand the reasons why I think this phenomenon will play out and how Bitcoin will be the catalyst.
The Roots of Inequalities
If you visit the Philippines, you will see beautiful skyscrapers next to the most poignant poverty. The same thing will happen if you go to India or other developing countries. Wealthy people are living in ivory towers while poor ones are living off of their crumbs
If you are lucky and you were born in a first world country, you haven’t probably witnessed such disparities. The reason is that wealth has been equally distributed among the population in most western countries for the past 100 years.
But this has not always been the case. In fact, inequality was a dominant force in society centuries ago. Back in Europe, very few people actually owned their lands. Most farmers lived as tenants on their lords’ properties, had to maintain the land, and pay hefty taxes in exchange for the “privilege” to live there. In the worst case scenario, sometimes landlords would exchange or sell their tenants like mere merchandise. It was a very unequal situation which prompted the French Revolution in 1789
Resetting the clock
What shifted the balance toward the majority of the population was that after WWI and WWII, progressive taxes were employed in every western country to finance the war, going from 1-2% of tax on annual income to up to 90% for the wealthiest slice of the population. For example, in the USA, for almost 20 years straight (from 1948-1964) there was a 90% marginal tax on income for very wealthy people.
A New Middle Class
Nowadays in the USA and western Europe, the top 10% holds around 60% of all the wealth and it has been steadily increasing. The lower class, which comprise 50% of the population, still has next to nothing and owns only 10% of all wealth.
But what is different this time is the new middle class, which didn’t exist in the 18th and 19th century, that equals around 40% of the population that now owns 30% of the total wealth. This is why inequalities in western countries have decreased so much over the last century.
The lower class, which accounts for 50% of the population, still owns nothing (about 5% of total wealth) but because the wages are much better distributed due to minimum wages laws and an easy access to credit, the lower class can now afford a normal daily living. But most of it will own next to nothing when it is time to retire.
The Rich are getting Richer
First let ourselves become familiar with the only formula that matters to us and that you can find in Thomas Piketty great book “Capital in the Twentieth Century”:
where r = return on capital invested
and g = growth rate of the economy
This formula shows that the return on capital invested is always bigger than the growth rate(r>g). This is of the utmost importance. This simply means that as a general rule, you cannot out earn someone else’s investment. If you start with enough capital through inheritance for example, you will get richer and richer, owning a larger part of the economy as a result.
The growth rate of the world’s economy has been averaging around 0.8% for the last 500 years and just over 0.2% for the previous 1500 years.
If you could have got a net return of 2% a year, you would have outearned the economy for the entirety of human history. There has been a very short period of time when growth rate was higher in the past few decades but that was an abnormal situation.
in other words, If someone is richer than you to start with, they will own more and more of the stock of wealth over a long enough period of time. Yes, you can create new capital by creating new technology and starting businesses like Microsoft and Apple did, but as a general rule, accumulated capital grows faster than the growth rate of the economy.
Taxing for Equality
I consider myself in line with most libertarian ideas and I am against using violence or threat to tax people. But based on this formula and what we just saw, the only way that for the past 100 years, a middle class was able to flourish in developed countries was because of progressive taxes. The taxing put a lid on the accumulation of capital of the very wealthy.
In USA and most of Western Europe today, if someone was about to own every land available, the government would vote a special tax or force them to sell part of their lands through threat of violence so they wouldn’t end up as landlords of every citizen.
That is why the French Revolution happened, people were tired of seeing aristocracy composed of only 2-3% of the population get richer and richer while everyone else was starving and getting poorer.
So if r>g(return on capital is always be bigger than growth rate), and if the only way to redistribute wealth or at least to confiscate it from the very wealthy has been through tax, what is the place of Bitcoin in all of this?
Bitcoin is the culprit
With Bitcoin it is impossible to confiscate or tax someone’s wealth. Governments can vote special laws to forcefully levy taxes on someone very rich all they want, but because of Bitcoin censorship resistance property, they will not be able to apply that law without the full consent of the Bitcoins owner. You could own 10% or 50% of all the Bitcoins and nobody could force you to do anything.
Let say someone has 1 billion dollars worth of Bitcoin and they can live without having to work by drawing a salary from there wealth at a rate of 0.5% or 5 million dollars annually.
When you have assets worth 1 billion dollars or more, you can pay financial advisors a few million every year to find exotic investment strategies like derivatives that are simply not accessible to regular investors. Usually, such investment firm can generate around 4-5% return on capital annually.
Regular fees for such service are usually around 1% of the value of the portfolio. By paying 10 million dollars annually, these investors can hire the service of money managers that will find the best investment strategy for them. If those managers can get a return of 4-5% and the owners use only 0.5% to live off every year and pay 1% annually in fees, they are left every year with a return of 2.5-3.5%. This amount gets compounded every year and no additional work is required of the owner.
You can see that over time these people will end up with more and more money. When they die and they pass on their wealth to their children, this phenomenon will continue unaltered. Their children will live on an ever-growing stock of capital. Over time, 90% or more of the stock of capital in the economy could end up being owned by only a handful of people and Bitcoin would make it impossible to tax.
Family inheritance will own the world
This will lead to a landlord-tenant situation just like during the middle-age in Europe, where most of the land and capital in the world was owned by only a handful of people.
Imagine Bill Gates gifting all his wealth, which amounts to almost 100 billion dollars, to his children. They could live a very comfortable life by drawing 0.5% annually from it or 500 million dollars. If they hired a team of professional money managers for 1% fee or less of the portfolio, they could generate 4-5% return without having to work a day in their lives (That’s 5 billion dollars net return annually). Their investment would grow bigger and bigger because most of the return is re-invested in the portfolio.
Because all this wealth could be kept untaxed through Bitcoin, it would grow to a gigantic proportion. And because of the worldwide reach of our current economy, Gates’ children would not only end up owning France or England, but most of the world.
Bear in mind that no one would tolerate this kind of situation for very long. The citizens of an area would organize themselves and confiscate the physical assets if it was at all possible and redistribute them among themselves in a more equitable way. This would restart the clock until the process begins again.
This is why so many socialist revolutions have happened in South-America in the recent past. Rotten to the core, government institutions were facilitating the accumulation of all the means of production and wealth to a very small minority politically favored. With no hope for the future and no other choices, people revolted and got lured into socialist states.
The Socialist experiment has been tried many times and always ended up with tragic results, just think of all the death and misery suffered in the URSS. But when a population is completely destitute, it will try anything.
The Possible Solutions
Because you cannot use violence against Bitcoin holders to redistribute wealth, redistribution of wealth must be voluntary, which is good. But there is no indication that such selfless act will happen at grand scale anytime soon.
Bill Gates and Warren Buffett pledged to give all their money to charity when they die which is great. But I doubt that any Russian oligarch or rich oil family in the Middle East will have any intention of doing the same. The world is not only made of well-intended people like Gates and Buffett.
Bitcoin is a protocol and it is completely voluntary to join or use and it has numerous competitors. I think a movement to start using a different cryptocurrency would be the only force able to reset the clock again. If the inequality became unsustainable, Bitcoin would have to be replaced with another cryptocurrency, but that would be in a 100 years or more.
With that being said, it is clear to me that because of it’s limited supply, Bitcoin will become a bigger part of the world economy year after year. People who have accumulated Bitcoin early on will see the value of their investment grow bigger and bigger.
So one obvious conclusion is not to wait on the sideline. Take action today and get yourself a share of the available stock of Bitcoin. In the near future, owning one full Bitcoin will seems like a far fetched idea because of its higher price but it is not too late now. Buy Bitcoins and hold on to them!