Crypto Is Still a Solid Hedge Against Inflation’s Runaway Freight Train

 

by Juan Villaverde
By Juan Villaverde

Growing up in Latin America taught me two things:

1. How to mix a mean margarita and ...

2. How to deal with inflation.

Cocktails, however, are not our topic today. So, that leaves lesson No. 2: the feverish inflation sweeping the world today.

The first thing you should know about inflation is that it's not going away. You may hear talking heads on Bloomberg and Fox Business Network say it will … just as soon as interest rates climb above some magical threshold.

But these TV talking heads have never even seen real inflation, much less lived through it.

I have.

And the biggest thing these folks fail to understand in their naiveté is the self-reinforcing character of the inflation mindset.

When people expect inflation, they alter their behavior in ways that creates more of it.

Yes, we have continuing supply-chain disruptions from COVID-19 lockdowns, geopolitical chaos and reckless money printing. And yes, these factors have combined to create a near-perfect environment for spontaneous combustion.

And I don't fault those who don't know better if they think that once these causes are dealt with, things will be dandy again. But once the inflation fire gets roaring … it takes on a life all its own.

Inflation begets more inflation. And round and round it goes.

Global central banks can obviously get inflation started. After all, they have legal authority to print money. But what they cannot do … is control it once it gets going on its own.

And that's the part of the movie that's playing out now. I saw it time and again, growing up in Latin America. Generally, the sequence of events runs like this:

1) Something ignites high inflation — usually reckless government spending, financed with money printing. No surprise here.

2) Once people wake up to rising prices, they rush to buy things today, because they expect them to cost more tomorrow.

3) They pour their savings into assets they think can hold their value long term (maybe land or precious metals). They also borrow a lot, because they expect to repay their loans with cheaper dollars than the ones they borrowed.

4) Most pernicious of all, people start demanding higher wages to offset the rising cost of living.

Bear with me, here. I'm not some rabid, union-busting, anti-labor partisan. But I am an economist. So, let me explain why this last item is so alarming …

Businesses have power to set prices for their products. So, naturally they try to pass higher costs on to customers (to maintain their margins).

But what happens when these price increases become widespread — as is the case now?

Well, all those customers — many of whom are also workers — go to their bosses. And collectively demand higher wages (to maintain their standard of living).

One of the biggest costs for almost any business is labor. So, when labor costs rise, businesses turn right around and jack up their prices even more.

Not just enough to cover their cost of doing business today … but in anticipation of future wage increases they think are probably already in the pipeline, so to speak.

This is the dreaded (but aptly named) wage-price spiral.

Higher wages lead to higher prices — which lead to even higher wages in a self-reinforcing loop.

Once you're sucked into this vortex, it's pretty damn hard to escape.

Indeed, the only way out involves inflicting recession hardships on large swaths of the population.

Problem is … in politics, you rarely go wrong pandering to voters' worst instincts. Like envy and greed.

High inflation makes it easy for populist politicians to win votes by promising to crack down on "greedy businessmen." Sadly, this kind of rhetoric almost always seems to go down well. And all the more so when folks are distressed and eager for someone to blame.

I've seen this countless times in Latin America. And I see it in America today.

It gets worse.

Once elected, these politicians almost always continue the same reckless policies that caused inflation to begin with.

Plus, they now have campaign promises to punish "them" — their political opposition — for their greed … with hostile regulations, confiscatory taxes and sometimes outright asset seizures.

But such treatment only encourages entrepreneurs and job creators to shut down and leave the country in search of green pastures abroad.

This puts more people out of work and reduces real economic output, leading to still higher inflation.

"Tough love" is the only way to really fight inflation.

That's what Federal Reserve Chair Paul Volcker did in the late 1970s and early 1980s, when he hiked the federal funds rate to 20%.

These tight money policies evoked a nasty recession in 1980. And they cost Jimmy Carter (the president who made Volcker the fed chair) his reelection.

But they also saved the U.S.

Sadly, there are no Volckers in Washington today. And the very idea of sacrificing one's political future for the good of the nation … seems quaintly odd and outdated.

Worst of all, the costs of fighting a Volcker-style war on inflation are infinitely higher today than they were 40 years ago.

The world is so addicted to free money that weening ourselves off it would swiftly lead to nukes flying and nations disintegrating. And because of this, everything is on autopilot.

The world is now in the early stages of an epic, self-reinforcing wage-price spiral … which the Fed is trying fight with a toothpick. It's not going to work.

But all things end in judgment. And mark my word, there will be blood in the streets well before the end of this inflationary spiral finally arrives.

That's why it's so important to make choices now to protect you from when this freight train jumps the tracks and goes out of control.

As the world of traditional finance (TradFi) spirals, crypto will be there to offer an out.

My colleague Jurica Dujmović wrote about a few of our team's favorite picks, as well as two top strategies to use when getting started that you should check out.

And you should keep an eye on your inbox for even more actionable information from Weiss Crypto Daily.

Best,

Juan Villaverde

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