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The problem is not inflation. What is the problem?

September 11, 2020

Much is said about the inflation problem. In fact, Bitcoin is presented countless times as a hedge against inflation. Furthermore, it could be said that according to some, inflation is the problem Bitcoin is trying to solve. The biggest names in the crypto community often attack the fiat currency system as inappropriate and present Bitcoin as the great solution. You describe with indignation the depreciation of the dollar over time. And they heavily criticize the role of government in the economy. There is a narrative that suggests a tough monetary system and portrays inflation as the worst in the world. Is inflation really our main problem?

This narrative is only possible because of subtle flaws in its logic. Usually, issuance is confused with inflation. There is talk of injecting liquidity and it is automatically assumed that we will have inflation for this. I fear issuance is not inflation. The myth probably started with Milton Friedman, who said at the time that inflation was always a monetary phenomenon. In some cases this is true. Money has a huge impact on inflation, but it doesn’t stop there. Of course there are other factors in the equation. Friedman was a great economist, but his theories are not perfect. Indeed, many have been refuted.

Read on: Bitcoin and cryptocurrencies are not a hedge against inflation

The problem is not inflation. What is the problem?The problem is not inflation. What is the problem?

The problem is not inflation. This is a very common mistake in the crypto space. Phrases like: Bitcoin has an inflation rate of X is often used. The inflation rate of gold will be below the inflation rate of Bitcoin in the next halving. Out of ignorance or necessity (I don’t know) the terms “emission” and “inflation” are used synonymously. Well they are not. Because of this mistake, many speak indignantly of the charms. Many have even gone so far as to say that the United States will have hyperinflation in the near future. Others have compared the United States to countries like Venezuela or Zimbabwe. Everyone is talking about the show. However, you forget to quote the latest inflation report.

In order to know the inflation in a country, the question of currency is not checked. In fact, it goes on the streets and the prices of goods and services are checked. There is inflation in the price of things. On the other hand, we also need to check the price of the currency in relation to other currencies. This shows his evaluation on the international market. This crisis is perfect to show that emissions and inflation are not the same. The issue was spectacular, but inflation was minimal. In addition, inflation was negative in a few months. The dollar went through the roof in March and April and everything was done to weaken it, but it continues to rise. We’re not at the March / April level. But it’s still very strong.

Another misconception is the notion that scarcity is everything. While it is true that a scarce good tends to rise in price and an abundant good tends to fall in price, we cannot forget about demand. For example, my drawings can be unique. But if no one pays a dime for them, their scarcity is of little use. In other words, it’s not just about creating a scarce currency and sitting on your laurels to sing victory. Unfortunately, it’s not that easy.

There is one more element that we need to consider here. It’s about volatility. The volatility is recognized but underestimated. That said, it is claimed that it is not a big deal. However, the stability of the currency in trade is very important. Volatility is good for a speculative asset that is held as an investment. But in retail you need a stable environment.

Read on: Jerome Powell tosses the US dollar under a bus in Jackson Hole

As an example, let’s take a dealer who has Venezuela as its base of operations. Due to the inflation of the Venezuelan bolivar, the legal tender, prices are defined in dollars. Many of your customers pay in dollars. Others pay in bolívares but at the bolívar / dollar exchange rate of the day. Every day the trader has to buy dollars because the bolivar loses value within a few hours. Your suppliers charge in dollars, your debt in dollars, and you probably have an agreement with your employees to pay wages in dollars. You have big profit margins in some areas and probably not in others. Volatility is terrible for him. Using Bitcoin can get you in trouble at any time. But it’s safe with the dollar.

On the other hand, you could invest in Bitcoin. You could have an investment portfolio and you could have Amazon or Apple stock there too. And suddenly he already has a house in Miami. These are long-term investments. And there is a special fund for that. But your hedge against inflation is the dollar. You can tolerate 2% annual inflation as this inflation will benefit your inventory. All you have to do is increase your prices by 2% per year. That can be planned. How can you plan if you will work with Bitcoin?

Obviously, dollar inflation is not a problem for anyone right now. What is the problem then? The problem now is economic inequality. The older ones take most of the cake and leave very little for the little ones. This can be demonstrated with numbers. In an average year, the SP 500 will grow by at least 10%. On the other hand, average GDP growth in the United States has rarely exceeded 3% in recent years. Salaries have not risen in a long time. But the richest can borrow at rock bottom rates and pay almost no taxes. Financial assets are through the roof and salaries through the floor.

Immigration, technology, globalization, the weakening of the trade unions and little state aid have left the pockets of the middle and lower classes down. But this very situation was a miracle for financial asset owners. Everything gathers up. But for the things below, things don’t grow at the same rate.

Read Next: Why is the Dollar So Strong?

The problem is not that there are many billionaires out there. It’s not about posing things like Elizabeth Warren or Bernie Sanders. It must be recognized, however, that not everyone has benefited in the same way over the past few decades. The following have stagnated for years. The growth is too little. And Wall Street is growing rapidly thanks to (mostly) public funding. Politicians have no problem injecting capital into big corporations like Apple and Amazon, but when it comes to giving money to the small business owner and funding a social program, obstacles and debates begin.

Bitcoin is not a solution to inflation. First, there is no inflation problem. Second, Bitcoin is not a good hedge against inflation. But Bitcoin can be a solution to inequality. Here we have a very accessible asset with great potential for future growth. The SP 500 is growing faster than GDP, but Bitcoin can grow faster than the SP 500. In Bitcoin, we have a treasure.

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