Almost every country in the world has experienced a prolonged period of high inflation. What options are there to hedge against inflation and how well do they work? This article looks at what inflation really is, shows graphic examples of its danger, and throws us a lifeline called Bitcoin.
The risk of inflation
Everyone talks about inflation these days. However, inflation and, above all, its effects are largely underestimated. An analogy helps: John D. Rockefeller, who controlled 90% of US oil production in the late 1800s, had an estimated fortune of $ 1.5 billion. That sounds like a lot, but at the same time not really, because today his fortune would be worth 341 billion US dollars. This discrepancy is rarely questioned, but without having heard of inflation, the difference seems insane. Why should your fortune be worth more today? Why is everything that belonged to you on average 227 times more expensive today? After all, isn’t it the same fortune?
Using the Rockefeller example, the danger of inflation for ordinary people becomes clear: inflation is bad for savings. After all, why would you save on anything if it’s cheaper today and savings lose their purchasing power over time? Inflation makes it difficult to plan for our future because we don’t know how expensive it will be.
Also, not all prices go up at the same rate. If all goods were affected by inflation in exactly the same way, the conditions between goods would remain the same. However, this does not correspond to reality. Food prices, wages or property increase asynchronously. In general, inflation devalues wages and savings because the prices of goods increase faster than wages, so we can buy less with the same wage.
How does inflation arise in the first place?
There are mainly three reasons why inflation occurs.
Increased cost inflation occurs because companies pass on costs to customers. If a pencil producer suddenly has to pay more for wood and his rent goes up, he passes these costs on to the customer by increasing his prices. Employees who demand more income because there is a shortage of labor or because they are politically organized increase their costs and therefore their prices.
Demand inflation is the price increase that arises because more people want the same limited goods. A growing demand with a fixed supply raises prices. This inflation may have good origins. People are getting richer and therefore offering more money for the same products.
Tax cuts also lead to this type of inflation because people pay less taxes and therefore can spend more. Low interest rates also make people spend more because they can borrow money cheaply.
The “money printer”
The third factor is the “money printer”. To create jobs and boost the economy, central banks have been creating new money, especially since March 2020. To do this, you actually use a money printer, increase your national debt, or let the banks write off more debt. Here you can find an overview of how much money central banks have printed in recent years and how it relates to Bitcoin.
Of course, after a while a bill is worth less because more and more bills are chasing the same goods.
Inflation can no longer be hidden
Traditional economists agree on one point: a little inflation is good. This is debatable, but regardless of our opinion, these economists point to 2% annual inflation.
So how many countries still have inflation under control? Apparently only a few …
The major industrial and emerging countries are clearly experiencing inflation above the 2% forecast. This high inflation did not start yesterday. We have been hearing the story from central banks that inflation is only “temporary” since mid-2020. This suggests that not only will prices remain high, but we will have to wait for high inflation for a longer period of time.
So how do we protect our purchasing power when inflation is so high? The traditional answer, taught in many finance books, is to not take the risk, park the money in government bonds, and wait for things to get back to normal. How well does this strategy work?
Obviously not good. Safe countries have lower yields to compensate for inflation, and high yield countries have other monetary problems. So surviving in the bond market is not possible.
Is the answer simply to do nothing? Incorrect. Compound interest has a strong effect and our purchasing power can decrease in a very short time:
Now two options remain: invest in stocks and real estate, which are at their highest levels, or invest in the new world, that is, in Bitcoin and digital assets.
Can we protect ourselves with Bitcoin?
A logical conclusion from these findings is that we are switching to decentralized, limited storage of value to protect our assets. In these attributes, as Affolter Consulting shows in this article, Bitcoin is the best option. We not only reached this conclusion, but also private and institutional investors from around the world.
Of course, this is not a guarantee that Bitcoin will continue to grow as fast as it will in the future. But once money flows into bitcoin from the bond market, bitcoin’s market capitalization can quickly jump from one trillion to two, five, and ten trillion. Here’s a context for that:
We are still early.
If you have any questions or would like other help on the subject of Bitcoin, you will find the following contact details for the author.
About the Author
Jonas Affolter is the Managing Director of Affolter Consulting and works as a Bitcoin consultant in the DACH region. On his home page, he has a blog where he simply explains relevant Bitcoin topics for free, presents his views, and posts market updates.
Email: [email protected]
This article is not intended as investment advice and is for informational purposes only. The views mentioned in this article are created by the author and may contain errors.