Rising prices mean inflation, falling prices mean deflation. These two scenarios should be familiar to those who pay close attention to economic news every day. With the huge sums of money being poured into the markets through monetary and fiscal policy in the course of the coronavirus pandemic, the specter of inflation has been reawakened. Long underestimated by the world’s central banks, this has now become a serious problem, because no one, not even fed-Chef Jerome Powell – You can tell how long inflation will last. Meanwhile, however, an old acquaintance is also celebrating his return to the spotlight on the world political stage: stagflation.
Member of the Governing Council of the ECB warns about stagflation
When recession and inflation meet, this is called stagflation in economics. This phenomenon last became prominent in the 1970s. The last two phases in the US are shown in Figure 1. At the time, the US Federal Reserve was struggling with inflation rates of more than ten percent at times. Economic growth (shown in orange) briefly fell into negative territory due to the oil shocks.
For a long time it seemed as if the concept of stagflation had been buried once and for all. But now the fear of stagflation has even returned to the highest levels of the European Central Bank (ECB) returned On March 3, Mario Centeno warned about a possible scenario of stagflation in Europe triggered by the Russia-Ukraine war. For this he said:
There are possible stagflation scenarios. These, of course, depend on the duration of the conflict and the more or less concerted (fiscal) response of the Europeans.
Mario Centeno, Source: Reuters
Weak growth expected
Even before the outbreak of the war in Ukraine, the clouds of recession had grown ever thicker. New horror reports of problems in companies’ supply chains appeared almost daily. At the same time, rumors were circulating about how often the Fed would raise interest rates this year. However, for a long time they did nothing, always with the same argument that inflation was temporary. However, the US Federal Reserve now seems to have gotten into a real dilemma. If you don’t raise interest rates fast enough, you risk inflation running too high. On the other hand, there is a risk that raising interest rates too quickly could plunge the economy into a sharp recession. is particularly pessimistic Atlanta Federal Reserve. This had lowered its growth forecast for the first quarter of 2022 from initially 1.3 percent to 0.6 percent and then to zero percent. Another factor that could point to an impending recession is the spiraling rise in oil prices. As a result of the Ukraine war, this rose to nearly US$140 per barrel, the highest level since 2008.
Is stagflation realistic?
Various indicators now seem to point to stagflation. What does that mean concretely? Prof. Dr. Gunther Schnabl, Professor of Economic Policy and International Economic Relations at the University of Leipzig and Director of the Institute for Economic Policy, explains to BTC-ECHO how acute the danger of stagflation is at the moment:
I think stagflation is likely for two reasons. In the first place, the growing intervention of the State in the economic cycle, which slows growth more and more and favors economic slowdowns. Since the negative economic consequences of state intervention are cushioned with the help of the central bank, the surplus of money over goods increases further, thus increasing inflationary pressure.
Gunther Schnabl to BTC-ECHO
So, are we already in a phase like in the 1970s? The economist certainly sees parallels here:
Yes, global inflationary pressures in the 1970s came from US money press funding for the Vietnam War and US welfare spending. As is the case today, inflationary pressures were expressed in particular through increases in energy and food prices. Rising energy prices and the negative growth effects of expansionary monetary policies led to economic and (geo)political instability. Inflation solidified as unions responded to rising prices with higher wage demands, forcing companies to raise prices (wage-price spiral).
Gunther Schnabl to BTC-ECHO
Energy prices as Europe’s Achilles’ heel
A look at the commodity and energy markets underscores the economist’s claims. The price per barrel of the North Sea variety Brent it was able to rise further at the beginning of the week and is currently trading at around US$127 per barrel. Of particular concern, however, is the rise in gas prices in Europe. Due to the beginning of the war and the cessation of north stream 2 the price of liquefied gas had literally skyrocketed. These increases in the prices of raw materials not only make home heating more expensive, but also affect the manufacturing industry, especially the food industry (keyword: increase in fertilizer prices). Extreme swings were also seen in metal markets. For example, the price of nickel rose in the London Metal Exchange (LME) within two days by as much as 250 percent to more than US$100,000 per tonne. Trading was then suspended until further notice.
While the US barely imports oil or gas from Russia, Europe is likely to feel the effects of rising energy prices much more severely. To what extent this external shock will slow growth in the eurozone cannot be predicted at this time. Ultimately, the mixed situation could lead to an acceleration of the inflationary spiral. After all, Russia is one of the world’s largest suppliers of raw materials. It is also conceivable that the countries of Europe will not sit idly by and watch energy and food prices rise, but will intervene boldly. The former hedge fund manager and founder of the video platform also supports this scenario. royal vision, Raoul Pal for very likely (see Twitter post below). Therefore, the financial expert expects additional fiscal spending, financed by the printing press, to relieve the population financially.
Confidence in fiat currencies is crumbling
The events of the past few months seem to have made many people realize how quickly seemingly stable fiat currencies can lose value. The Russian population in particular felt this with all its might. The ruble has been in free fall since the outbreak of the war in Ukraine. Figure 2 shows the exchange rate of the ruble against the US dollar. A rising rate means that the ruble is losing value. The Russian central bank has already reacted and imposed drastic restrictions on foreign exchange trading in the face of Western sanctions. According to the latest reports, Russian banks will not be able to issue foreign currency until early September.
But even before the war broke out, confidence in the world’s central banks seemed to be breaking down. For a long time, monetary authorities, notably Jerome Powell in the US, gave the impression that they were not really taking developments in inflation seriously. Professor Schnabl also seems to agree.
Long-standing loose monetary policies by central banks have undermined confidence in fiat currencies. This process has accelerated significantly again in recent months.
Gunther Schnabl to BTC-ECHO
Bitcoin: the great speculator?
The biggest question now is how Bitcoin will perform in an environment of persistently high inflation rates and a weakened economy. Schnabl is confident in this regard: “The demand for stable stores of value is increasing, which favors bitcoin. With the growing instability in the international financial system, bitcoin’s payment function could also be further strengthened.”
Consequently, Bitcoin could emerge as a big winner from stagflation. Because one thing is for sure: sooner or later, high inflation rates will put pressure on people’s wallets. Typically, it is gold, real estate, US dollars, and US government bonds that perform well during stagflation. In the period under review, between 1970 and 1980, the price of gold soared by more than 1,600 percent, from around US$36 per troy ounce to more than US$600 per troy ounce in 1980. It remains to be seen. whether Bitcoin will similarly prosper.
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