The world breathes a sigh of relief as things normalize after the devastation of the Covid-19 pandemic. Governments are lifting locks, restrictions are being relaxed, and the economy is slowly returning to a semblance of normalcy. As a result, consumer spending increases.
Inflation is increasing
In April, CNBC reported that US consumer price inflation was up 4.2% year over year. In addition, the consumer price index rose 5.4% year-over-year in June, the largest increase since the global financial crisis in 2008. Excluding energy and food, core CPI rose 4.5, the biggest jump since 1991.
The big question now is what is causing the high inflation.
Increase in money supply
The Federal Reserve has flooded the economy with dollars to contain inflation. According to Forbes, the M2 money supply was $ 20.11 trillion in April 2021, up 30% since January 2020. Too many dollars in the system reduce the currency’s value.
In addition, there is a need to catch up – more money for fewer products – which exacerbates the inflation problem. Remember, when the COVID-19 pandemic broke out, some manufacturing facilities were closed while others were downsizing. As a result, the market has run out of stocks. The demand for flight tickets has also risen again.
Manufacturers are working against time to meet demand. For example, the pandemic affected car production. As a result, the cost of used cars and trucks is higher than ever. The point is that limited supply of goods coupled with the expansion of the dollar in the economy leads to inflation.
What is the US inflation debate?
The real inflation rate is a growing concern of economic policy makers in particular. While the whole discussion might be confusing to the masses, it is crucial. The next course of action could result in an economic slowdown, an increase in mortgage rates, and high volatility in stock prices. For these reasons, in-depth economic data will be of vital importance to financial analysts, policy makers, and economists.
According to AP News, Federal Reserve Chairman Jerome Powell argues that the rise in inflation is temporary, caused by the reopening of the economy after the pandemic. While the Federal Reserve maintains that the inflation rate averages over 2% and then falls, many economists disagree.
According to the strategist at Bank of America, inflation could rise by up to 4% and last longer than the Fed reports. David Roche, president of the investment firm Independent Strategy, sees it similarly. He said inflation could hit 3-4% by mid-2022. This could lead to a crisis in the financial market and the entire US economy.
According to the Thinkers, the Fed’s measurement tools are inconsistent with consumer spending. In other words, consumer inflation is underestimated. Once consumers start feeling the effects, they are likely to push for higher wages, starting a vicious circle of inflation.
Effects on other countries
US inflation will not spare other countries either. The high inflation will make the US dollar more attractive to other countries. Hence, capital outflows are likely to occur in these countries as investors look for high returns. The result will be market volatility, slow economic growth, and a high interest rate.
This means that countries with dollar denominated loans will have a hard time paying back their loans. In the worst case scenario, a recession could occur in some countries. Needless to say, the whole world is watching and they want to see how far this goes.
Bitcoin the best inflation protection?
Fears of inflation are evident as economic contraction and government incentives increase the global money supply. Bitcoin has positioned itself as the perfect protection against inflation. Unlike the fiat currency, Bitcoin is not regulated by the central bank. In addition, it has a limited supply of 21 million units. This is in contrast to fiat currencies, which can be capitalized, as is done in the United States.
Bitcoin’s decentralized nature makes it a perfect store of value. Additionally, Bitcoin proponents believe the price of virtual currency could rise as investors flee from fragile conventional financial systems. Hence, Bitcoin can act as a safe haven for investors.
Bitcoin Hedging Success
A good inflation hedge is an asset that increases in value over time. Bitcoin has withstood the harsh effects of the Covid-19 pandemic with relative ease. It was trading at around $ 5,000 when the coronavirus was recognized as a global pandemic. That said, Bitcoin is up 235% in the past 52 weeks and many analysts focused on predicting Bitcoin prices went so far this year as to predict that BTC would still hit the 100,000 mark by the end of the fourth quarter of 2021. Will reach dollar mark.
Inflation has risen over the same period, and while inflation was “only” 2.6% in March according to US inflation rate data from Trading Economics, it rose rapidly in April, with the CPI 4.2%, 5% May and finally reached 5.4% in June. This time around, Bitcoin spread and responded well to inflation.
Hence, investors who have turned to Bitcoin to hedge against inflation are smiling. We have seen the institutional rollout of cryptocurrency by companies that see tremendous potential in Bitcoin growth.
Bitcoin is also an excellent hedge against the social disruption and political instability that result from inflation. For example, uncontrolled inflation leads to increased insecurity, poverty and a lack of trust in institutions. Zimbabwe, Argentina and Venezuela are just a few examples. While these cases are unlikely in developed countries, it is better to play it safe. Remember, Venezuela was one of the richest countries in the world in the past and see how they are doing today from an economic perspective. Hence, using Bitcoin as a hedge against instability, broken payment systems, and government control is a prudent move.
Usually, rising interest rates are one of the ways to contain inflation. However, many current economies are indebted. Therefore, this step could have the opposite effect. As a result, the inflation rate could continue to rise even if interest rates rise.
Fortunately, Bitcoin trading is mostly based on US dollars. Therefore, if the dollar is falling, there is no good reason why the BTC / USD pair shouldn’t keep rising. Additionally, the decentralized nature of the Bitcoin network and the fact that it is based on technology created by anonymous people that does not provide a central point of failure or attack make Bitcoin an excellent asset. It is not limited to the conventional economy.
Bitcoin is pretty safe in the current world environment, where old ideas are fading and new ideas are taking root. In addition, given the changing politics and economy, Bitcoin is a good hedge against the possibility of a “crazy future”.
The global nature and limited supply of Bitcoin make it an excellent protection against inflation. It is not controlled by governments or financial institutions. Therefore, it is not susceptible to economic measures that lead to inflation, such as: B. increasing the currency supply by printing. In fact, Bitcoin’s price spike as inflation during the Covid-19 pandemic is sufficient evidence of its massive potential as a hedge against inflation. Suffice it to say, given rising inflation, cryptocurrency has positioned itself as a safe haven for investors.
This is a guest post by Jerry Goddard. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.