The specter of deflation haunts the world and monetary authorities in advanced economies are constantly concerned about it. Speaking of Europe. Falling prices are seen everywhere as restrictions from Covid-19 and job insecurity have pushed spending significantly. In Spain, for example, hotel room prices have dropped by as much as 60% in some cases, and it is estimated that it could be at least a couple of years for prices to return before the coronavirus. This is, of course, a major challenge for the European Central Bank and its new head, whose mandate is monetary stability. This crisis is deflationary. This is the main cause of unemployment. Most Bitcoiners, however, are in a declared war on inflation. What’s going on here?
The term “inflation” always hits an uncomfortable key for many people. This is not the first time I have spoken on the subject. And I’m getting used to the fact that the moment I write the sentence: “There is no inflation”, hateful messages from all over the world reach me. I once shared 2020 data from the US consumer price index. This is a study conducted by the United States’ Bureau of Labor Statistics and is the official reference used to determine the rise in prices of goods and services in the country. Despite the fact that the United States Federal Reserve has done everything it can to raise the rate of inflation, it has not been easy to hit the 2% annual target.
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Anyway, someone on Twitter didn’t really like the number given in my article on inflation. And outraged, he complains to me and says that there is a lot of inflation in Turkey. He also added that real estate in New York is very high because the apartments are bad. “”How can you say there is no such thing as inflation?”Wrote this tweeter, obviously very annoyed with me. Well, I can tell you that I fully understand the trouble I get into talking about inflation. Especially within the Bitcoin community, because this is an extremely sensitive topic. It’s like talking about the delights of roast beef at a vegan conference.
Inflation is not that important on Wall Street because the goal there is not to protect yourself from inflation but to beat the SP 500. In other words, the mission is that our investments grow at least 10% or 20% every year. The SP 500 is used as a benchmark because it is the average. So it is known that we get mediocre performance below the SP 500 and good or excellent performance above the SP 500. It seems to be different with Bitcoin. Based on the dominant narrative, the goal seems to be to beat dollar inflation. That means not to lose this 2% per year. I find it extremely ironic that an asset as lucrative as Bitcoin has such a mediocre narrative. 2%? Is that the big tragedy? Is that the big problem that Bitcoin solves? “Really?”
From a personal investment perspective, the inflation problem was resolved many, many years ago. It’s called “Buying Assets”. If the problem is 2% then there are many options. You can buy bonds. But you can also buy a house. Or we can do what many people do. We can invest in the SP 500. Finished. The problem has been solved.
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Inflation is the general rise in the price of goods and services in a country. When we talk about the dollar, we are talking about the prices of goods and services in the United States. And when we talk about the euro, we are talking about the prices of goods and services in Europe. But we must also remember that inflation is an average. If the Chinese restaurant near you has increased its menu, if the price of Coca-Cola has increased by two cents, or if the price of downtown real estate has increased, it doesn’t mean the country’s inflation has increased.
Now if we say that the inflation rate in Spain for 2020 is -0.3. We’re not talking about Turkey or real estate in New York. We are talking about an official figure that assesses the development of prices for goods and services in Spain in 2020 based on very specific criteria. The fall in demand leads to a drop in prices. This in turn affects business revenues and leads to layoffs. We usually call this a “crisis”.
The monetary authority is obliged to maintain currency stability. This usually means inflation of 2% per year. As we can see, an inflation rate of -0.3% puts Spain in a deflationary block. That explains the current high unemployment rate. Now the solution is to increase demand by injecting liquidity. That way, prices can go up again, so companies can get back on staff and the economy recovers. This process is known as “reflation”. That is, deflation will be corrected to restore stability. In other words, the famous 2% per year.
What is the libertarian solution to the deflation problem? What does the Austrian Business School recommend us? I’m talking about it because a lot of Bitcoiners are in this anarcho-capitalist wave. Let’s search in March 2020. The coronavirus is coming and changing our lives. The crisis begins. Companies are closing, prices are falling and people are losing their jobs. What is a libertarian’s solution? Well the solution is to do nothing and let the free market take over. In the middle of this carnage, bad actors die and the best will survive. This “temporary pain” is necessary to purify the economy and make it more efficient. It’s a very spartan vision of “What doesn’t kill me makes me stronger”. It’s the cost of freedom.
The idea of promoting a hard currency system is to eliminate the possibility of liquidity injections by creating these perpetual deflationary crises so these bloodbaths keep cleaning up the economy. Freedom comes with responsibility. In other words, it’s a local men’s economy.
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That is the detail of deflation. Modern economists view deflation as a bad thing. But many libertarians, inspired by economists like Ludwig von Mises, say this view is wrong. Deflation is good. The only demon is inflation. And currency stability is not a necessary requirement because it is artificial. Hence the gold standard is good. The hardness of the coin is very positive. I mean, why take medicine when the man’s body can heal itself? Grrr.
Let’s say for a moment we are in March 2020 and the Federal Reserve and the European Central Bank decide to listen to Mises and go straight down the libertarian path. Well, we could speak of a crisis that will last at least 20 years. It would be a real hell. And the social and political tensions on the streets had reached terribly dangerous levels. The streets would surely be on fire now. Libertarians may be right. But the price for this “freedom” is much higher than what today’s society is willing to pay.