The issue of inflation is central to conservative economic thought. Libertarians, in particular, have a habit of complaining about inflation at all times. Even moderate inflation is seen as an evil. And, on the other hand, the supposed benefits of a deflationary picture are defended. Ironically today, deflation is related to economic crises. Why so much discrepancy? Is an annual inflation of 2-4% comparable to an inflation like that of Venezuela? Is the solution a hard coin? Is deflation so beneficial?
First, to understand the ultra-conservative position, you have to travel back in time. Exactly, conservatism is a reactionary movement. In other words, it seeks to return to the past. But I’m afraid it’s an idealized past. What is that past? Well, it relates to the gold standard. That is, it refers to the time when it was possible to save. Production lowers prices. And if the supply of the currency is fixed, that means that the currency goes up in value as the goods and services go down in price. In other words, it is business to hoard currency.
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Conservatives point out that this deflationary picture eliminates bad actors and stimulates technological innovation. The industrialist is forced to produce more in order to make a profit in a climate of low prices. Apparently, all the money hoarding stimulates capital accumulation which means access to more financing for investment. In theory, deflation makes markets more efficient. But it has an additional advantage. The free market is the one that plays the main role in the whole process. Which means that state intervention is unnecessary.
What is the problem with this box? Its main flaw is that it does not work in practice. It is a myth that conservative politicians have sold as an ideal for many generations. However, in practice, it is a catastrophe. Who says it? History says so. According to current economic thinking, deflation is synonymous with crisis. What actually happens is that deflation lowers business income. And this reduction in income, sooner or later, generates unemployment. Unemployment produces a fall in demand. Hence, more deflation. Welcome to an economic crisis.
In the past, economic crises could last for decades. The Great Depression of the last century, for example, was a fairly long period. However, over time, we have learned to resolve crises with better monetary and fiscal policy. While it is true that the current system has many flaws, it is also true that we have made considerable progress. We are still bad. But we are better. It is no accident that the conservative stance that advises state non-intervention in times of crisis only finds a voice in a small minority.
Why is moderate inflation viewed as a positive? We have already briefly explained the evils of a deflationary picture. And we have disproved the conservative stance on deflation as a myth. We well know that excessive inflation also has negative effects (it decreases the purchasing power of employees, etc.). However, the evidence indicates that an annual inflation of 2-3% stimulates economic growth, fosters employment and allows planning. This means that central banks must maintain monetary stability by supplying new currency at the rate of production.
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The aforementioned is a measure that currently has consensus. Both conservatives and progressives agree with this position. In other words, it is the most accepted practice in the world, because it is the one that offers the best results. The differences focus on the amount of stimuli. But no one denies the need for such stimuli. Now, the crypto community is full of liberators with ideas from the 19th century. Consequently, in this space, cries of lament are constantly heard around an annual inflation of 2-3%. Sometimes you don’t know if they are talking about the United States, Europe or Venezuela.
Due to the coronavirus crisis, the United States Federal Reserve has decided to take extreme measures to accelerate the economic recovery, temporarily allowing inflation above historically permitted targets. These exceptional measures are being allowed to stimulate the reactivation of the productive apparatus. Without a doubt, it is a very risky measure that can get out of control at any time. In opinion, the stimuli are necessary. But it has been greatly exaggerated with the amounts of liquidity injected. I would have preferred more stimuli (fiscal spending) to the real economy. And less to financial markets (monetary policy). Due to these exaggerations, we are experiencing a K-shaped recovery.
Inflation is an increase in the price of goods and services. Specifically, inflation is a figure published by the responsible authority. In other words, it is a statistic that is governed by a criterion. What does this mean? Suppose apples increased in price by 200%. This does not mean that inflation increased by 200%. However, people go to the supermarket and complain that the reported inflation does not correspond to what their eyes see. However, food is only one item. What is happening with telecommunications? What is happening with the rents? What is happening with the services? Real estate in New York can be through the roof. But how is real estate in Louisville, Kentucky? Averages are averages. In many cases, the average does not represent the particular. In other words, the anecdote is a bad indicator of inflation.
Now, how do we protect ourselves from inflation? Simple. Buying assets. Only a fool accumulates cash as an investment. Dollars are a very useful medium of exchange. But they are not the best investment. The solution is the purchase of assets (metals, real estate, businesses, bonds, stocks, etc.). In other words, the solution is not saving, it is investment. As simple as that.
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Due to overheating generated by the recovery, investors are concerned that inflation will spiral out of control. In this case, investors have chosen to protect themselves by investing in productive businesses. In what many call the “value” sector. The “growth” sector, being a much more speculative sector, has not benefited from such concerns. Crypto has also not benefited every time the market worries about inflation.
Crypto liberals today speak of Bitcoin like gold beetles spoke of gold in ages past. I mean the defense of saving a hard currency. But all this is said in the context of an ideology. Reality tells us otherwise. In practice, investors seek to protect themselves from inflation by acquiring productive assets. Ironically, Bitcoin has benefited quite a bit from a deflationary picture laden with monetary stimulus. In other words, Bitcoin thrives in times of abundant liquidity. Like it or not, the Federal Reserve is our Fairy Godmother. Bitcoin is not a hedge against inflation per se. It is a highly profitable speculative asset in times of financial optimism.