Bitcoin

Why do so many bitcoiners not understand the concept of „deflation“?

In the midst of the pandemic, the economic situation has become more like a deflationary picture than an inflationary one.

The spectre of deflation is haunting the world and monetary authorities in advanced economies are constantly concerned about it.

Speaking specifically of Europe. Falling prices can be seen everywhere, as restrictions due to covid-19 and job insecurity have significantly depressed spending. In Spain, for example, hotel room prices have dropped in some cases by as much as 60% and it is estimated that it could take at least a couple of years for pre-coronavirus prices to return. This is, of course, a big challenge for the European Central Bank and its new director, whose mandate is monetary stability. This crisis is deflationary. That is the main cause of unemployment. However, most bitcoiners are at war with inflation.

What is going on here?

The term „inflation“ always hits an uncomfortable key for many people. This is not the first time I’ve talked about it. And I’m getting used to the fact that the moment I write the phrase, „There is no inflation,“ I start getting hate mail from all over the world. I once shared the 2020 data from the U.S. Consumer Price Index. That is a study conducted by the U.S. Bureau of Labor Statistics and is the official reference for determining the increase in prices of goods and services in the country. Although the U.S. Federal Reserve has done everything possible to raise the inflation figure, achieving the annual 2% target has not been easy.

Anyway, someone on Twitter didn’t like the figure quoted in that article of mine about inflation very much. And, outraged, he claims that there’s too much inflation in Turkey. And he added that real estate in New York is very high, because the apartments are uncollectible. „How are you going to say that there is no inflation,“ that tweeter obviously wrote, very upset with me. Well, I tell you that I understand perfectly the mess I’m getting into when I talk about inflation. Especially within the Bitcoin community, because that’s a very sensitive issue. It’s like talking about the delights of roast beef at a vegan conference.

On Wall Street, inflation is not that important, because the goal there is not to protect against inflation, but to beat the S&P 500. The S&P 500 is used as a reference, because it’s the average. So, it is known that below the S&P 500 we are looking at mediocre performance and above the S&P 500 we are looking at good or excellent performance. In the case of Bitcoin, that seems to be different. According to the dominant narrative, it seems that the goal is to beat the inflation of the dollar. In other words, not to lose that 2% per year. I find it extremely ironic that an asset as lucrative as Bitcoin has such a mediocre narrative. 2%?

That’s the big tragedy? That’s the big problem that Bitcoin solves? Really?

From a personal investment standpoint, the problem of inflation was solved many, many years ago. It’s called „buying assets. If the problem is that 2%, then there are many options. You can buy bonds. But you can also buy a house. Or we can do what many people do. We can invest in the S&P 500. The problem is solved.

Inflation is the general increase in the price of goods and services in a country. If we’re talking about the dollar, we’re talking about the prices of goods and services in the United States. And if we talk about the Euro, we’re talking about the prices of goods and services in Europe. But we must also remember that inflation is an average. If the Chinese restaurant near your house increased its menu, if the price of Coca-Cola increased by two cents, or if the price of real estate in the center of the city increased, that doesn’t mean that inflation in the country has increased.

Now, when we say that the inflation rate in Spain for 2020 is -0.3. We are talking about an official figure that evaluates the evolution of the prices of goods and services in Spain during 2020, using very specific criteria. The fall in demand generates a fall in prices. This in turn affects business income, creating layoffs. This is what we normally call a „crisis“.