Bitcoin maximalists spent years warning people that inflation was going to destroy their purchasing power. With the onset of COVID-19 and the release of tens of trillions of dollars in central bank stimulus, inflation finally showed up on government radars via the consumer price index. Even the CPI — the inflation they want to show — printed multi-decade highs around the world, raising doubts about governments’ ability to manage rising cost pressures.
Of course, inflation doesn’t directly refer to the uptick in consumer prices. Higher prices are merely a product of inflation, which refers to the expansion of the money supply. Inflation comes from the word “inflate,” and in this case, what’s being inflated is the supply of money in the economy.
Central banks are tasked with managing the money supply by setting interest rates, printing money and dictating bank reserve requirements. When inflation actually shows up in consumer prices, you can bet your crumbling dollar that central banks played a major role. They’ll be saying otherwise, blaming everything from greedy corporations to unions and even shipping containers, but behind the scenes, the printer is going “brrr,” and the excess money is flowing to asset markets and consumer goods, where more dollars compete with yours.
2021 was the year that crypto investors turned their attention from dog memes to something far more pressing: inflation. By December 2021, the United States’ CPI hit 7% from a year earlier, marking the fastest pace of expansion since June 1982. Inflation in the Eurozone, a collection of 19 countries that use the euro, reached the highest level on record amid a surge in food and energy costs. Emerging economies like Argentina, Turkey, Brazil and Russia recorded even bigger price spikes on average.
The inflated money supply also made its way to asset princes, including stocks, housing and cryptocurrency, which soared to record highs in 2021. The crypto markets peaked at $3 trillion in early November, having more than tripled since the start of the year.
Faced with soaring prices and a disgruntled public, U.S. Federal Reserve Chair Jerome Powell conceded in November that policymakers understated the true effect of inflation and even suggested ceasing use of the word “transitory” when describing it. In December, the Fed began mobilizing its fight against inflation by unveiling plans to taper its monthly bond purchases and raise interest rates in 2022.
A more hawkish Fed sent stock and crypto prices tumbling in the early new year as investors began to evaluate the impact of tighter liquidity conditions on risk-on assets. With inflation expected to remain elevated for much of 2022 and possibly into 2023, investors are still looking to the Fed for clues about the pace and timing of future rate hikes and asset-tapering.
In this environment, will Bitcoin finally prove its value as an inflation hedge, or will it trade as a speculative asset? Much to the disappointment of the crypto community, Bitcoin still follows the price actions of stocks, but will it stay this way in 2022? No one can say for sure as we drift further into uncharted waters. In the meantime, don’t expect inflation to be “transitory.”
Law & Politics
