Inflation has been the word of the day for a few dozen days now, and it’s starting to show its ugly side in everyday purchases and global policy. This week, we’re going to look at a few key indicators of the new inflationary environment, read perspectives from economists and policymakers, and try to figure out where Bitcoin and crypto fit into this potential new economic world.
First up, let’s talk about the price of pizza. New York economists have measured the stability of the greater economy with a particularly New-Yorkish indicator–the pizza principle. The pizza principle was first floated as an idea in the 1980s and it’s fairly simple: in a normal functioning economy, the price of a slice of cheese pizza will always be the same price as a subway ride.
Sounds silly, but when you dive deeper it’s actually an intriguing pulse on the power of your dollar. Since 1960, the price of pizza has essentially moved in lockstep with a subway ticket. Within the last few weeks, this indicator has diverged. Today, the average slice of cheese in NYC costs $3.14 whereas metro fares remain at $2.75 a ride. So what does this demonstrate? The cost of energy, ingredients, and labor is rising at a faster than usual pace. And it’s having a real impact on people’s wallets (and stomachs). (Bloomberg)
Now, let’s zoom out from the Brooklyn bodegas. Way out. Central bank chief, Agustín Carstens, thinks there may be more to worry about than the price of lunch. He warns that “the world economy may be on the brink of a new inflationary era with persistently higher growth in consumer prices due to the retreat of globalization.”
And Carsten’s words carry weight. He’s seen globally as the chief of the central bank for central banks. So how does he figure we best stifle inflation? You guessed it, higher interest rates. Carsten states, “higher borrowing costs could be required for several years to curb the risk of spiraling prices wreaking long-term damage on the economies of the industrialized world.” (The Guardian)
Economies around the world are battling inflation in real-time. Just last week, due to pressure from the FED, banks raised rates on 30-year fixed mortgages at a staggering rate. Today, they’re hovering above 5% for the first time since 2011, up from 3.38% one year ago. Those basis points add up to real monthly costs. For example, the same $350k loan at 3.38% versus 5% could be a monthly payment difference of a couple of hundred dollars depending on credit score and downpayment. (CNBC)
This is putting pressure on would-be homebuyers. They now either eat the higher monthly cost or get squeezed out of the market. Which is exactly what the FED wants to see. In an inflationary economy, there are two main tactics to correct upward racing prices: inflate the supply, or suppress the demand. So what could hurt the pockets of Americans in the present should hopefully help reset the economic fuse in the long term.
Bankers and investors are catching on to their plan and placing their bets accordingly. Goldman Sachs recently updated their economic forecast, stating they see a 38% chase of recession in the next 24 months. Others are bolder, like former New York Fed president Bill Dudley, who believes a recession is “inevitable.” Or former Fed governor Lawrence Lindsey, who sees a recession as soon as next quarter. (Fortune)
The US government is taking action, too, announcing a balance sheet cut of $1.1 trillion for this year. This drastic cut in spending combined with ratcheting up interest rates is their plan to cool off the red-hot economy. At least, it’s their plan so far, with talks to hike interest rates further, this time in 0.5% chunks up from 0.25%. (Bloomberg)
So where does this leave us–the crypto investors at the forefront of a burgeoning global asset class? That’s the million-satoshi question. Here’s the optimistic scenario: Bitcoin and many cryptocurrencies are a natural hedge against inflation. Just this week, Bitcoin mined its 19th million Bitcoin, leaving just 2 million more to go. As investors across the world scramble to transfer their funds from inflation-sensitive assets to inflation-resistant, surely Bitcoin would be a sensible spot to park your money. (Cointelegraph)
Unfortunately, it may not be that simple. Lately, crypto’s overall value has largely been associated with growth and tech stocks. And if the recession warning signals are true, tech stocks may be in for a turbulent ride in the near term. Only time will tell how investors view Bitcoin and crypto in the greater context of an inflationary economy. For now, my money’s on pizza.
Top market movers as of April 8, 2022
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