Investing surplus money to beat inflation and preserve purchasing power has become a full-time job in 2022. Stocks, Bitcoin
Converting savings into durable assets, which appears to be gaining at a similar, if not faster, rate than inflation, appears to be the only method to preserve purchasing power in 2022. In this high inflation environment, Tangible assets such as land, property, and commodities act as safe havens.
The significant increase in the price of durable assets reveals a broader problem with global economies. In other words, the polarization of the economy. This refers to the inequality problem in which the 1% owns the majority of durable assets that the 99% must continue to pay for.
During the pandemic (2020-2022), most economies used trickle-down economic logic to distribute stimulus packages, which resulted in new funds being sent to banks and other financial institutions in exchange for securities and debt. mortgage-backed bonds. These institutions have not been able to effectively invest the new funds in economic units still under the constraints of COVID-19. As a result, they bought more durable assets, knowing that the new money would cause inflation.
As pandemic restrictions have been eased, employees who were supporting the economy have returned to work under completely different circumstances. The market for durable assets had become more polarized and prices had risen. Higher gas prices, higher shipping costs, higher food prices and higher housing expenses have surrounded the post-pandemic world, and now interest rates are rising, eroding disposable income remaining through higher debt payments.
As a result, people are forced to work harder, longer hours, or quit their jobs in search of better paying opportunities in order to maintain their standard of living as it was before the pandemic. This resulted in “The Great Resignation” in the United States, with consequences that extend to other economies. The goal of owning a home, a lasting asset, has become even more out of reach.
Central banks react to rising inflation by stifling demand in their own economies. Interest rates are increased to do this. Higher interest rates increase the cost of credit, causing more money to be diverted to loan repayment rather than demand. The average household will spend more of its income on paying down debt, leaving less cash to spend on already expensive consumer goods.
Central banks do this because they cannot increase the supply of durable assets such as land, property, and commodities. Scarcity breeds irrational behavior, so we should expect to see more governments hoarding durable assets in the future to ensure self-sufficiency. This includes everything from food to farming supplies to semiconductors. This could lead to even greater polarization and an acceleration in prices, making it difficult for the average household to make purchasing decisions.
If the situation gets worse, governments will be forced to print more money in the form of a Universal Basic Income (UBI). This new money can be distributed in a bottom-up logic to ensure that the average household can afford basic necessities such as food, shelter and health care. The rich 1% will get richer, while the poor 99% will get poorer. So how does Bitcoin solve this?
Above all, Bitcoin is a durable commodity and asset. It is difficult to extract or obtain, and supply is limited. Its price, like that of other physical assets, is determined by the dynamics of supply and demand. As a result, it is an excellent asset for storing value and protecting it from currency devaluation.
As businesses continue to add bitcoin exposure to their portfolios, demand for bitcoin may drive the price up significantly to match fiat inflation, and perhaps even higher given the tight supply cap. of Bitcoin. Bitcoin can also become polarized. The difference is that the polarization phase is still in its early stages, so most individuals, households, and small businesses have a fair chance of buying this product before institutions.
Everyone wants to get their hands on high-demand hard assets like real estate, land, energy, food, and shipping materials. However, recent events in Turkey, Ukraine and Canada have highlighted the need for a currency that cannot be manipulated or confiscated by the government at a transactional level. People in emerging economies have been forced to explore a tougher currency that cannot be rationed or devalued due to the massive movement in exchange rates between the US dollar and foreign currencies. Bitcoin is gaining traction as a currency that can help individuals deal with the problems of fiat currencies and traditional financial systems.
It is important to remember that Bitcoin remains highly correlated to stocks, and if this correlation breaks over the next two quarters, it will be a sign that Bitcoin is moving towards a store of value rather than just a transactional currency.
Disclosure: I own bitcoins and other cryptocurrencies.