Published By Feedzy
The money system confuses experts. Do we currently have inflation or deflation? And what will we have in the future? The economists are so divided that each prediction is as random as a coin toss. The manipulation of the money supply by the central banks makes money arbitrary – and unpredictable. Calling prices in euros is similar to trying to measure something with a constantly shrinking measure. Bitcoin with its fixed money supply could change this.
Do we currently have inflation in which prices rise? Or rather deflation with falling prices? And what are the prospects for the future? How about in a few months, how in a few years?
The experts are extremely divided on this issue. It is like an open-heart surgery – in which the surgeons argue about whether there is a heart attack or maybe cirrhosis.
Inflation or deflation?
In June there was an official price increase of 0.9 percent in Germany compared to the previous year. That is below the ECB’s inflation target, which is just below two percent. However, if you take a look at everyday goods and services, inflation clearly exceeds this mark:
Prices at the hairdresser rose by 5.1 percent, those for restaurant visits by 2.6 percent. Food rose overall by 4.4 percent, with fruit standing out at 11.1 percent. Apples recorded a price increase of 25, lemons and melons by 30, and blueberries even 41 percent. But meat also rose by a whopping 8.2 percent, while the prices of vegetables exploded in April: zucchini rose by 92, various types of cabbage by 60, and bell pepper by 56 percent. In the meantime, this should have calmed down somewhat.
But also for consumer goods such as garden furniture and garden tables, prices rise by more than 10 percent. It is even 23 percent for garden loungers, 13 percent for sunscreen, and 21 percent for garden hoses. Cases, bike racks and tents are also experiencing a price increase of around 10 percent. Real estate prices continue to rise as before, and insurance companies and health insurers are already announcing that premiums will increase in 2021. The fact that inflation is only 0.9 percent in these circumstances is only due to the sharply lower prices for heating oil and petrol.
In view of this massive rise in the price of everyday goods, it is surreal if Olli Rehn, a member of the European Central Bank (ECB), does not warn of inflation but of deflation. There is no demand, which leads to falling prices. His colleague Isabel Schnabel also fears that the eurozone will slide into deflation in falling prices in the coming month. The Institute of German Economics even explains that everyday experiences are completely misleading. There would be no inflation – rather located the eurozone already in a strong deflation. 14 EU countries would have a negative inflation rate, for example Greece with 1.7, Cyprus with 2.5 or Italy with 0.4 percent.
Critics, on the other hand, argue that the official shopping baskets do not reflect the reality of life. Especially not in times of Corona. Who cares about cheap travel prices when nobody dares to go abroad? And what help do discounts at petrol stations have if you are in the home office? Alternative indicators, such as the Chilli-con-Carne index or the Wiesn measurement ratio, have long painted a completely different picture – one of the stronger inflation.
Economists are therefore at odds over whether we currently have inflation or deflation. This looks so surreal, as if meteorologists were sitting on the terrace and did not agree whether the sun shines in a clear sky or whether it pours twine.
What will it look like in the future?
The experts’ judgment becomes even more chaotic when it comes to the future. The Handelsblatt sums up the disorientation: there is more money than ever, and the central banks buy bonds more vigorously than ever. Theoretically, this should result in inflation – but can also have a deflationary effect. What exactly happens depends on the politics and the markets. When the rooster crows on the dung …
The Tagesschau, for example, is primarily concerned with deflation. It predicts “artificial deflation” caused by the temporary cut in VAT. She relies on Stefan Bielmeier, the chief economist at DZ Bank, who expects a negative inflation rate of 1.0 percent in July, and on Holger Schmieding, the chief economist at Berenberg Bank, who has reduced the inflation rate to minus 0.8 percent in the current month estimates.
At the same time, the Tagesschau also quotes economists who are worried about inflation. Take Andrew Wilson from Goldman Sachs Asset Management, for example, who points out that a high government debt burden usually resulted in inflation. Ifo President Hans-Werner Sinn is also reminded of the time after the First World War, when Germany tried to fight a crisis with freshly printed money and reaped hyperinflation.
The FAZ, on the other hand, quotes the economist Karsten Junius from Bank Sarasin, who expects strong deflation in the coming months. The Swiss finance portal Themarket, on the other hand, names a number of investors and economists who fear significant inflation. The famous economist Peter Bofinger, on the other hand, explains to the “German inflation phobics” that the risk of deflation is much greater than that of inflation.
You could probably go on like this forever. One economist fears inflation, the other deflation. Forecasts as to whether it will rain tomorrow or not seem to have no scientific basis anymore, but rather a matter of taste for the experts. The monetary system seems to have escaped rational access and predictability.
The extreme measure
Of course, there are factors that affect prices and that have nothing to do with monetary policy. Corona, for example, led to a collapse in demand and production, the collapse in oil prices was primarily the result of Russian politics, and the huge price hikes by zucchini were the result of imports from Italy and Spain falling due to the corona. The weather also has a not decisive influence on the annual fruit and vegetable prices. Prices are a reflection of the markets, and they are never fully predictable.
However, central bank monetary policy adds further uncertainty factors to the chaos of the markets. When a panel of experts begins to manipulate the money supply in the event of unforeseen events, such as an economic crisis, it makes the entire scenario even more difficult to understand. How should one predict the future price development if it is impossible to guess the future money supply? Is it even possible to take the euro seriously as money under these conditions?
Prices as an indicator of purchasing power are becoming increasingly meaningless. The “old” currencies, which were based on precious metals like pounds, thalers or ducats, kept their value for a very long time. If someone said “1 thaler”, this sum had the same meaning for decades, if not centuries. The euro has lost this consistency after just 20 years. 100 euros in the early 2000s was very different from 100 euros today. How should a unit of measurement that moves constantly be suitable to measure precisely? Using money whose amount changes uncontrollably as a basis for prices is like using a scale that changes the weight of a kilogram every few months. You measure with a trembling measure.
Is that good or bad? I can’t answer that. The “hard currency” economies were plagued by great misery, great inequality and little progress. It is impossible to say whether it was the money or simply other technical and social standards. Perhaps it is modern monetary policy that prevents us from falling back into misery; but maybe it will force us to grow, which is unhealthy for both humans and the environment because it keeps pushing us to do more, instead of allowing us to enjoy the fruits of our civilization. Or is it not a scandal that people have to continue working every day after thousands of years of technological progress?
Money with less uncertainty
What if you removed the uncertainty factor “money supply” from the system? One would be with Bitcoin. The money supply at Bitcoin is strictly defined by an algorithm. There will never be more than 21 million bitcoins, and their distribution over time is precisely regulated. You know relatively exactly at any point in time how many bitcoins there will be in any future moment. Everything is predictable.
This makes Bitcoin a “hard measure”. The kilogram of this scale remains the same forever, the meter does not constantly change its length. In the short term, Bitcoin may be volatile. But in the long run, it can be a much more stable and precise unit to measure values. Bitcoin would remove an element of uncertainty from the money system – the inflationary money supply – and set up a new fixed point that creates stability and, above all, predictability.
Compared to the steadily growing money supply of the euro, Bitcoin is a good investment in the long term. So far, the euro has lost value year after year, sometimes more, sometimes less, sometimes so mildly that it was hardly noticeable, but as reliable as clockwork. Escaping Bitcoin as an investment will help individuals protect themselves from loss of value. But real estate, gold and stocks do the same. In order to curb the chaos, one would have to replace the trembling measure with a fixed measure – one would have to use Bitcoin as money.
And Bitcoin means no stablecoins, and no altcoins with strong or uncertain inflation. But Bitcoin or another cryptocurrency with a strong and decentrally controlled creation of monetary units. However, the spread of Bitcoin as money is currently stalling. Even in the crypto scene, the need for a so-called “stablecoin” that reflects the instability of fiat money is growing. As if you had completely forgotten the idea of creating new, better money, because traders and companies are groaning under the short-term volatility.
The fiat money may first have to perish and fizzle out in extreme inflation before the world gets hungry to use Bitcoin as real money. But if you know one thing from history, it is this: The question is not whether this happens, but when.
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