Almost every country in the world has experienced a prolonged period of high inflation. What options are there to protect against inflation and how well do they work? This article discusses what inflation really is, shows graphical examples of its danger, and throws us a lifeline called BTC.
The risk of inflation
Everyone is talking about inflation these days. However, inflation and, above all, its effects are mostly underestimated. An analogy helps: John D. Rockefeller, who controlled 90% of American oil production in the late 19th century, 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 ever hearing about inflation, the difference seems insane. Why should his fortune be worth more today? Why is everything that belonged to him on average 227 times as expensive today? After all, isn’t it the same fortune?
Using the example of Rockefeller, the danger of inflation for everyday people becomes clear: Inflation is bad for saving. After all, why would you save on something if it is cheaper today and savings lose their purchasing power over time? Inflation makes planning for our future difficult because we don’t know how expensive it will be.
In addition, not all prices rise at the same rate. If all goods were affected by inflation in exactly the same way, the conditions among the goods would still be the same. However, this does not correspond to reality. Food, wages, or property prices all rise asynchronously. In general, inflation devalues wages and savings because goods prices rise faster than wages, so we can buy less with the same wage.
How does inflation arise in the first place?
There are primarily three reasons why inflation occurs.
Surge in costs
Cost surge inflation occurs because companies pass costs on to customers. If a pencil producer suddenly has to pay more for wood and his rent increases, he passes these costs on to the customer by increasing his prices. Employees who demand more income because there is a labor shortage 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. An increasing demand with a fixed supply increases the prices. This inflation can have good origins. People are getting wealthier and therefore offer more money for the same goods.
Tax cuts also lead to this type of inflation because people pay less taxes and can therefore 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’. In order to create jobs and drive the economy forward, central banks have been creating new money, especially since March 2020. To do this, you either actually use a money printer, increase your national debt, or let banks write out more debt. An overview of how much money central banks have printed in recent years and how this relates to BTC can be found here.
Of course, after a while a banknote is worth less because more and more banknotes are chasing the same goods.
Inflation can no longer hide
Traditional economists agree on one point: a little inflation is good. This is arguable, but regardless of our opinion, these economists are targeting 2% annual inflation.
So how many countries still have inflation under control? Apparently only a few …
The most important industrial and emerging countries are clearly experiencing more than the targeted 2% inflation. This high inflation didn’t just 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 that we will have to expect high inflation over a longer period of time.
So how do we protect our purchasing power when inflation is so high? The traditional answer, which is taught in many financial books, is not to take the risk of parking the money in government bonds and waiting for things to get back to normal. How well does this strategy work?
Obviously not good. Safe countries have lower returns to compensate for inflation and countries with high returns have other monetary problems. So surviving in the bond market is not possible.
Is the answer just doing nothing? Not correct. Compound interest has a strong effect and our purchasing power can dwindle within a very short time:
Now there are two options left: investing in stocks and real estate, which are at their highest levels, or investing in the new world, i.e. in BTC and digital assets.
Can we protect ourselves with BTC?
A logical conclusion from these findings is that we are switching to decentralized and limited value storage in order to secure our assets. In these attributes, as Affolter Consulting shows in this article, BTC is the best choice. Not only we come to this conclusion, but private and institutional investors around the world.
Of course, this is not a guarantee that BTC will continue to grow as fast as it will in the future. But once money flows into BTC from the bond market, BTC’s market capitalization can quickly jump from a trillion, to two, five, and ten trillion.