In the crypto ecosystem, inflation has always been considered an imminent danger. The problem is that not all analyses in this area are reliable, because they are usually conducted by dogma. In other words, they are not objective. We talk about inflation when there is no inflation.
Some people even talk about inflation during deflation. Because of the influence of liberals, the inflation issue in this field is more of a political issue than a macroeconomic one. But liberal inflation paranoia does not mean that inflation is not a real danger. Why are investors now worried about rising inflation? What is the real danger?
Over the past few decades, the facts have shown that inflation is a multifactorial phenomenon. The so-called "substantial moderation" period is characterized by extraordinary exchange rate stability. Of course, this claim may be unbelievable, because some people keep up with the rhetoric in the 1970s. In some circles, the processed narrative does not correspond to reality.
Whether we are willing to admit it or not, the central bank has learned the lessons of the past in dealing with the economic crisis. While it is true that the system is not perfect, it must be recognized that today we have more effective tools than in the past.
I fully understand that in the current strong anti-system atmosphere, this statement seems absurd. However, we can use historical records to verify accordingly. It is no secret that past crises lasted longer and that crises became more obvious to everyone.
Inflation depends not only on the money supply. In other words, this is not just a question of money. We must also pay attention to the production of goods and services. Globalization, technology, supply chains, industrial infrastructure, the availability of raw materials, the effectiveness of the financial system, government spending, consumer confidence, investment and many other variables will affect the level of inflation.
This means that no matter how much liquidity the central bank injects, it will not necessarily lead to inflation.
On the other hand, deflation is devastating. In other words, a shortage of funds will destroy the economy. In other words, failure to inject liquidity during a deflationary crisis will mean economic collapse.
More importantly, if this coronavirus crisis catches us with a hard currency system (for example, gold), then we will suffer a biblical humanitarian crisis. Declining demand will destroy income.
Also, no income means no jobs. This means a huge economic blow. If there is no massive injection of liquidity to increase demand, the economy will collapse. The extreme danger that can generate great social tensions.
Many people criticized the liquidity injection and advocated a currency tightening. However, few people are willing to tolerate the consequences of deflation. Liberal theory believes that deflation is a kind of "temporary pain". However, I worry that this Spartan attitude is incompatible with today's citizens.
In other words, society looks to the government for help during a crisis. Businesses need monetary stability. And almost no one wants to endure a decade of crisis out of dogma.
Of course, no one said it would be easy. In today's complex environment, currency stability is not like peeling an orange. From March to April last year, deflation left no choice but to inject large amounts of liquidity into the system.
At the time, the militants were the only ones advocating austerity policies. The decline in demand must be offset by a process called "inflation" to compensate for the new funds. In other words, inject liquidity to compensate for falling demand. The goal is to curb deflation and stability. The idea of doing this is not a whim.
Now, this is no longer March to April of last year. The situation is different now. The economy is already in danger of overheating, and this has become obvious. Even the inflation rate is very low.
Employment has not increased sufficiently. However, it all went too fast. And it is very likely that many things will turn out "good". By "good" I mean that many things are happening at the same time and inflation is rising rapidly.
Vaccine efficacy, a return to normalcy, reversals in the globalization process, protectionist trade measures, rising employment rates, rising minimum wages, rising commodity prices, and overly progressive and monetized fiscal policies can create economic risks that are too serious. This can lead to inflation.
I am here to talk about expectations. In other words, it is a hypothesis. Now everything is under control. However, people are getting more and more worried. There is no inflation, but inflation may occur in the near future.
Jerome Powell of the Federal Reserve has insisted on many occasions that everything is under control. In fact, the reserves do not appear to be changing policy in the long run. If this is necessary to increase employment, there is even the intention to tolerate inflation.
Many people now think Powell is wrong. Eventually he will have to change course. Here we have several options.
First, Powell is right. Everything will stay the same for a long time. Second, Powell was wrong, but he insisted on his policy. Third, Powell was wrong and was forced to change his policy. The third situation is bad news for financial markets. Because it means the end of the bull market.
If inflation rises, it will not be the end of the world or the end of the dollar. This is just the end of near-zero interest rates. This means that the Fed must withdraw liquidity from the system to curb inflation. Obviously, this will lead to financial collapse.
In the countercultural movement, there is always an apocalyptic atmosphere. Anti-authoritarian sentiment makes us distrust the system. Inflation is seen as the inevitable result of mismanagement of the U.S. dollar by evil institutions. However, investors should be more pragmatic than political.
What does this mean for investors? Well, it means that it is better to invest in assets. "Cash is junk." The best way is to build a diversified and balanced investment portfolio. If inflation is a danger, we must develop a strategy to win this battle.