The world breathes a sigh of relief as things return to normal after the devastation of the Covid-19 pandemic. Governments lift blockades, restrictions relax, and the economy slowly returns to an appearance of normalcy. As a result, consumer spending increases.
Inflation is rising
In April, CNBC reported that consumer price inflation in the U.S. rose 4.2% year-over-year. In addition, in June, the consumer price index rose by 5.4% compared to last year, the strongest jump since the global financial crisis of 2008. Excluding energy and food , the core CPI rose 4.5, the biggest jump since 1991.
Now, the big question is: what causes high inflation?
Increase in the money supply
The Federal Reserve has resorted to flooding the economy with dollars to curb inflation. According to Forbes, M2’s money supply in April 2021 was $ 20.11 trillion, an increase of 30% since January 2020. Too many dollars in the system reduce the value of the currency. .
In addition, there is accumulated demand (more money for fewer products) that exacerbates the problem of inflation. Remember, when the COVID-19 pandemic hit, some manufacturing plants shut down while others reduced their activity. As a result, the market has exhausted its reserves. Similarly, the demand for airline tickets is rising again.
Manufacturers work against time to adapt to demand. For example, the pandemic affected vehicle production. As a result, the cost of used cars and trucks is higher than ever. The point is that a limited supply of goods, along with the expansion of dollars into the economy leads to inflation.
What is the US inflation debate?
The real rate of inflation is a growing concern, especially among economic policymakers. While the whole discussion can confuse the masses, it is of critical importance. The next action could result in an economic slowdown, rising mortgage rates and high stock price volatility. For these reasons, incoming economic data will be critical for financial analysts, policymakers, and economists.
According to AP News, Federal Reserve Chairman Jerome Powell argues that the rise in inflation is transitory, caused by the reopening of the economy after the pandemic. While the Federal Reserve maintains that the average inflation rate will exceed 2% and then go down, many economic experts have a different opinion.
According to the Bank of America strategy, Michael Harnett’s inflation could rise as much as 4% and persist more than the Fed reported. David Roche, president of investment firm Independent Strategy, maintains a similar view. He said inflation could reach 3-4% by mid-2022. This could lead to a crisis in the financial market and the US economy.
According to thinkers, the Fed’s measurement tools do not match consumer spending. In other words, inflation experienced by consumers is underestimated. Once consumers begin to feel the effects, they are likely to push for higher wages, starting a vicious circle of inflation.
Effects in other countries
Inflation in the US will not save other countries. High inflation will make the US dollar more attractive to other countries. Therefore, these countries are likely to experience a capital outflow as investors seek 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 an approximate repayment of their loans. At worst, some countries may experience a recession. Needless to say, everyone is watching and they want to see how far this goes.
Bitcoin The best inflation coverage?
Fears of inflation are evident with the economic contraction and government stimulus that increases the global money supply. Bitcoin has positioned itself as a perfect hedge against inflation. Unlike fiat currency, bitcoin is not regulated by the central bank. In addition, it has a finite supply of 21 million units. This is different from fiat currency that can be printed in large sizes, as is the case in the United States.
The decentralized nature of bitcoin makes it a perfect value depository. In addition, proponents of bitcoin believe that the price of virtual currency could rise as investors flee from vulnerable conventional financial systems. Therefore, Bitcoin can act as a safe haven for investors.
Bitcoin hedging success
Good hedging against inflation is an asset that increases in value over time. Bitcoin has weathered the harsh effects of the Covid-19 pandemic with relative ease. It was quoted at around $ 5,000 when the coronavirus was recognized as a global pandemic. However, in the last 52 weeks, Bitcoin has risen 235% and many analysts focusing on predicting Bitcoin prices have gone so far as to predict that BTC will reach $ 100,000 by the end of the fourth quarter of 2021.
Inflation has risen over the same period, and second by second Trade economics Data on US inflation rates, inflation was initially “only” at 2.6% in March, rose rapidly in April, with a CPI hitting 4.2%, 5% in the May and finally 5.4% in June. This time bitcoin proliferated, responding well to inflation.
Therefore, investors who resorted to Bitcoin to protect themselves from inflation are smiling. We have seen the institutional adoption of cryptocurrency by companies that see huge potential in the growth of bitcoins.
Bitcoin is also an excellent hedge against the social disruption and political instability that result from inflation. For example, runaway inflation leads to an increase in uncertainty, poverty and lack of confidence in institutions. Zimbabwe, Argentina and Venezuela are just a few examples. While these cases are unlikely in developed countries, it is better to be safe than sorry. Remember, Venezuela was in the past one of the richest countries in the world and look at how they do it now from an economic point of view. Therefore, using Bitcoin as protection against instability, broken payment systems, and government control is a prudent step.
Rising interest rates are usually one of the ways to curb inflation. However, many current economies are in debt. Therefore, this move could have the opposite effect. As a result, the inflation rate could continue to rise even as interest rates rise.
Luckily, bitcoin trading is mainly based on US dollars. Therefore, as the dollar value decreases, there is no good reason why the BTC / USD pair should not continue to rise. In addition, the decentralized nature of the Bitcoin network and the fact that it works with technology created by anonymous people that offer no central point of failure or attack, make bitcoin an excellent investment asset. It is not limited to the conventional economy.
Bitcoin is quite secure in today’s global environment, where old ideas disappear and new ideas take root. Also, with the changing policy and economy, Bitcoin is a good protection against the possibility of a “crazy future”.
Final words
The global nature and limited supply of bitcoins make it an excellent hedge against inflation. It is not controlled by any government or financial institutions. Therefore, it is not prone to economic measures that lead to inflation, such as increasing the supply of foreign exchange through printing. In fact, the proliferation of bitcoin prices as inflation rose during the Covid-19 pandemic, is ample proof of its massive potential as a hedge against inflation. Suffice it to say that cryptocurrency has positioned itself as a safe haven for investors with rising inflation.
This is a guest message from Jerry Goddard. The views expressed are wholly their own and do not necessarily reflect those of BTC Inc. o Bitcoin Magazine.