The hidden inflation bomb — Cryptocurrency: Beyond printing money
40% of US dollars were printed in the last 12 months.
The world of finance is talking about the inevitable impact of bad decision-making by the US government and how the next recession will come from the exponentially increased money circulation. But many ignore another inflationary source creeping into the problem and compounding the potential impacts on the economy if left unchecked. This is Cryptocurrency, and it is a significant inflationary threat to our fundamental economics.
Currency circulation causes inflation when the supply of cash or equivalent increases artificially. Thus, exceeding the value creation provided in the economy and the demand at the same cost level rises. This leads to the supply side pricing rise in response which results in an exponentially proportional rise to the cycle of PPP decreasing during this period of economic shock.
Before we discuss how this fits in with Cryptocurrency, inflation at a controlled level is generally reasonable. It incentivises consumption and investment due to saving money in a bank account, creating a loss of value over time. But inflation, when unchecked, especially if wages remain stagnant, squeezes the purchasing power, and causes an economic cycle of declined consumption and relatively unaffordable pricing.
USD, for this discussion, is still the global currency and represents the global markets in trade to enough capacity for inflationary trends to take hold. The amount of new money printed by the FED in the US will inevitably lead to market collapse as the markers of these crashes are there.
To understand how Cryptocurrency is relevant to consumption, money in current economics holds a perceived value at which the general concept of barter can hold without the system’s inefficiency. This leads to Cryptocurrency not having a 1:1 exchange on USD to set value and is created just like the USD, which is printed or typed into the system as a new currency circulation in today’s world. Even the power required to create new currency is always at a significantly lower level than the actual exchange rate of these currencies like bitcoin.
This essentially implies that perceived value is being created from nothing in the form of a currency, which is, in essence, printing currency in its equivalent state as digitally printing USD.
What does this imply?
If the perceived value of Crypto circulation keeps increasing, it might outgrow the inflationary impact of the new USD circulation of $6.7 trillion as of January 4, 2021. More than $2.5 trillion in value is introduced within 12 months to the Crypto Market Cap, and out of that, the real value vs perceived value is challenging to articulate. If the trend continues, that number of $2.5 trillion might go as far as $8–10 trillion in the upcoming year.
Now a pure bubble with perceived value and no circulation of supply-side facilitation is serious but what is more serious is when cryptocurrencies like Bitcoin / Ethereum / Litecoin and more are actively getting used for buying goods, stocks and services. With the surge in Crypto, its integration as a global currency and usage in day-to-day activities and transactions is on an exponential rise.
Visualising Cryptocurrency Usage and Growth
This all leads to a bubble of inflation being produced that is not controllable or adjustable, and this additional risk layer is currently not being considered by any government or federal reserve / central banks.
What happens when the perceived value used at face value of traded exchange rate to buy goods and services is mixed in with massive currency circulation being introduced, which exponentially increases the currency’s demand capacity for goods magnitudes more than the actual supply of goods in circulation?
Also, consider that the median wages (Purchasing Currency) are essentially stagnant while unemployment is rising, house prices are rising, default rates are rising, yet the stock market is also rising!
I am not a doomsday speaker, but this seems like a severe time bomb for my fellow economists, bankers, and financial experts to consider and start a serious debate before the proverbial ‘Shit hits the roof’ beyond the already existing time bomb of the US causing inflation. In conjunction with Crypto’s unseen inflationary impact, the invisible tax inflation will create something on which we should be building accurate economic models to understand the true scope of the problem.
Now I support the “Concept” of Crypto as a decentralised currency as more transparency is much needed, especially seeing the madness of printing essentially 40% of the money in circulation. But I’m afraid I still must disagree with the deregulated nature by which Crypto is being used and effectively creating an unseen risk to our interconnected global supply chain. Let’s have a healthy debate.
About Me:
I have a successful Software / Innovation Development Company, helping my clients build a digital infrastructure that matters — ERP (RPA and IoT), Fintech and MedTech. Here is my LinkedIn.
I run a startup in MedTech and Fintech revolutionising Eye Care and Corporate Cash Flows.
Editors:
Aditi Garg — Cyber Security Specialist
Expert Review:
Krish Patel — Economics and Innovation
Swarnab Roy — Blockchain Specialist
Sources:
Figure 1 — https://www.statista.com/statistics/730876/cryptocurrency-maket-value/
Figure 2 — https://www.statista.com/statistics/730838/number-of-daily-cryptocurrency-transactions-by-type/
