The economy is going crazy: the money supply is expanding, the gross domestic product is falling – and yet inflation has been at its lowest for a long time. How is that possible? We look for reasons – and find a bottom-up redistribution that threatens to throw society back into feudalistic wealth. Bitcoin and other cryptocurrencies can help. When they finally arrive in bulk as money.
The money supply in the eurozone is currently growing rapidly. Compared to the same month in the previous year, it rose by 8.3 percent in April ; the M1 money supply, which roughly means cash and money in bank accounts, by as much as 11.9 percent. This is the highest increase since 2008.
At the same time, a sharp slump of more than 6 percent is expected for the gross domestic product in Germany . And that’s still comparatively mild. For Italy, Spain and France, economists even estimate declines of 8-11 percent in 2020.
There is more money, but fewer goods. Common sense says that prices have to go up now. Logical, right? But somehow it doesn’t happen. On the contrary, inflation in the eurozone fell to 0.1 percent last month , one of the lowest in ages.
The economy is anti-intuitive. This is so confusing that most experts no longer know what to do. Is there inflation or deflation? Or do we get both, but alternately?
We are trying to find an explanation for this strange phenomenon.
The shopping cart as misinformation
One explanation would be that inflation is simply wrongly calculated. The official calculation is based on a shopping cart that compiles goods that experts believe to reflect the needs of everyday life.
The fact that inflation is currently so low is mainly due to the massive collapse in oil prices. If you don’t heat with oil and drive a little car, you won’t notice much of it.
Economists at the University of Hohenheim believe that the official shopping cart does not represent people’s actual consumption habits. In an interview, they even call him ” misinformation of the population “. You have therefore set up your own shopping cart, the ” Chilli Con Carne Index “. It records around 70 foods and is intended to represent the inflation experienced by ordinary consumers. This was 7.5 percent in the first five months of this year alone. If it continues like this, it will be in double digits.
Another alternative index is the “ Gold / beer measurement ratio ”. It has measured the rise in Oktoberfest prices since 1950. Viewed in euros, it has reliably exceeded two percent and has averaged 3.9 percent for 70 years. The number of measurements that can be bought with an ounce of gold has fluctuated strongly since 1950 – a minimum of 46, a maximum of 227 – but remains much more stable in the long term.
Of course, such time series only make sense if you take into account the development of income. According to Wikipedia, the average annual wages have risen 25 times since 1950, but only six times since 1970. This would have reduced real purchasing power in measure since 1970. 50 years of economic growth, but less beer can be bought from ordinary income. This is a pretty frustrating finding.
Of course, income statistics are difficult; one can calculate with the average or the median, and there are certainly many different data sources that lead to different results. For example, one could add the increasing inequalities in income, as suggested by the Gini coefficient. Then the lower income brackets would have had to accept a considerable loss in purchasing power.
Beer is not everything you need to live. But it is a shame that you can buy less beer with your income in 2020 than in 1970. The gold Wiesn measurement ration clearly shows why you should put your money in a long-term stable currency like gold or bitcoin.
The big redistribution from bottom to top
The most interesting explanation for me is the circulation speed of the money. It is based on an economic formula called the ” quantity equation “. It goes like this:
P * Y = M * V
Of course, this looks very complicated at first. But it’s pretty banal: the price level (P) multiplied by the gross domestic product (Y) corresponds to the money supply (M) multiplied by its velocity (V).
If the money supply M increases, but both the current quantity (V) and the gross domestic product (Y) remain the same, the price level must rise. So there is inflation. If, on the other hand, the gross domestic product increases to the same extent, everything remains stable. But if, as is currently the case, an expansion of the money supply (M) is accompanied by a slump in the gross domestic product (Y), this should trigger quite a dramatic inflation. According to the above figures, it should be clearly in double digits.
There is only one variable that can save us from inflation in this scenario: velocity of money. If it drops, the right side of the formula remains stable. To avoid an increase in prices, a decrease in the speed of circulation must balance both the growth of the money supply and the decline in GDP. And that is exactly what has been happening for years : the speed of circulation is slowing, which is why there is no inflation despite the flooding of money by the central banks.
You might think we were lucky. One variable cushions the other and prevents something bad from happening. But in fact the opposite is the case: the decrease in the speed of circulation is a dirty scandal, which is the cornerstone of modern society. Perhaps we are currently seeing the consequences of this in the United States, where the process is already more advanced.
But back to the speed of circulation. What does it mean if it sinks? It means that money changes hands less often. It is bound. Since the 2008/2009 financial crisis, central banks have flooded the markets with money. However, the freshly created money does not reach consumer goods, but seeps into the financial markets. This can be seen in the inflation rates of investment goods:
- The gold price has roughly tripled since 2008, which corresponds to 10-15 percent annual inflation.
- Since then, the points of the DAX share index have roughly doubled, even tripling compared to the lows before and after 2008. This would correspond to 5-10 percent inflation.
- The real estate prices z. B. in Bavaria have roughly doubled since 2008. The increase is likely to be even higher in some regions. Here too, we have an annual inflation rate of 5-10 percent.
While the official inflation of consumer goods is at around 1-2 percent, investment products become more expensive at 5-15 percent, possibly significantly more. It’s easy to see that this dramatically increases inequality: if you had enough capital from 2008 to invest in gold, stocks, real estate (or bitcoins), you could double your wealth – while those for whom there was only a savings book couldn’t even offset the low inflation rate. A robbery took place behind the veil of “non-inflation”, shoveling assets rapidly from bottom to top.
The same program returns with the Corona crisis. Maybe even more extreme. The money supply is growing rapidly and GDP is falling dramatically while inflation remains minimal. Therefore, the trend is likely to worsen: increases in income and savings books will not be able to compensate for inflation in food, for example, while the prices of gold, stocks and real estate will rise noticeably. Those who have will be given, and those who do not have will be taken away. The distribution of wealth in feudalism returns.
It is quite likely that Bitcoin and cryptocurrency prices will also rise as a result. But that has nothing to do with a magical stock-to-flow ratio, just because Bitcoin is an investment product that binds money when the music presses flood the markets with money, but it doesn’t reach the consumer goods.
Bitcoin and other cryptocurrencies are currently playing the same uncomfortable role as gold, real estate, and stocks: they absorb the infiltrating central bank money, keep inflation away from consumer markets, and make the rich richer. But it doesn’t have to be that way. Instead, Bitcoin could be the instrument that breaks through this ominous dynamic and prevents the return to feudalistic wealth.
The solution would be very simple: use Bitcoin and other cryptocurrencies like money. Accept it in your online shop, accept it as a salary, or change your euros to bitcoins as soon as they have reached the account. Paid wherever possible with Bitcoin, and where it is not possible, Euro changes into Bitcoin at short notice. Does not save euros, but saves Bitcoin.
And by Bitcoin I don’t just mean the cryptocurrency BTC – I also mean other cryptocurrencies: Ethereum, Bitcoin Cash, Bitcoin SV, Litecoin, Monero, Dogecoin – any cryptocurrency with a limited amount of tokens, no premining and a reasonable distribution of the coins.
It has probably never been so important that Bitcoin and other cryptocurrencies to be here as money as they do today.