Where the economy could be heading
The inflationary tendencies of the past months have intensified further in March – the inflation rate is over 7 percent compared to 2021. Inflation is particularly noticeable in the energy sector – electricity, gas or fuel continue to fuel the development, food companies have also already started to sell their goods more expensively. If wages do not rise analogously, there is a threat of stagflation, i.e. high inflation with simultaneous recession, as we already experienced in the 1970s.
The outlook is bleak, especially when looking at the US bond market. There is a threat of a flattening of the yield curve, which will have a negative impact on the economy: Banks engage in maturity transformation – the conversion of short-term investments into long-term loans. However, if interest rates on short-term bonds rise, banks will no longer be able to obtain money so cheaply that they can pass it on in the form of long-term loans at higher interest rates. The result is rising interest rates on small loans, which ultimately has a negative impact on the economy.
This could result in a possible scenario of stagflation. This is a tricky situation for crypto investors because it is difficult to assess without historical data. In retrospect, it is above all the asset classes of precious metals, commodities and real estate that have performed well in a stagflation. Here, the wish is father to the thought that bitcoin could develop similarly to gold. Between 1970 and 1980, the price of gold exploded from around 36 US dollars per troy ounce to over 600 US dollars in 1980.
However, it is also conceivable that inflation cools down and turns into deflation. An oversupply on the market due to the effects of the pandemic and productivity advances due to technological innovations could well lead to falling prices. This view is held, among others, by former Goldman Sachs hedge fund manager and founder of Real Vision Finance, Raoul Pal, who believes that inflation will not go through the roof. In an interview on Real Vision, he argued that the US economy could cool down sharply as early as this summer. Due to a demand destruction, inflation would thus also come back, which in turn could put the US Federal Reserve in a rather wait-and-see position, with no further interest rate hikes.
He also sees the inflation driver commodity prices as having reached a plateau in the meantime and as purely demand-driven. In this context, he draws a historical comparison to China’s rise after the dotcom bubble in 2000. At that time, the country’s massive economic boom brought with it enormous demand for commodities, although the average rate of inflation between 2000 and 2008 was only three percent.
The crucial question for us, however, is how Bitcoin will be treated by the market in the future. If it is traded similarly to gold in the 1970s, then a price rally is likely with a view to a stagflation environment. However, how the further development will be cannot be clearly determined due to the uncertain geopolitical developments and their effects on the macroeconomy – the uncertainty factors in the conflict between Russia and Ukraine are too great.