How closing inflation target of 2% could positively impact crypto
Central banks have used established targets to keep inflation on track, but the current economic turmoil may cause them to be adjusted upwards. This would be bad for fiat currencies, but good for crypto in the long run.
For years, central banks have used monetary policy to keep inflation on target, typically at or below 2%. In the meantime, the governments will continue to work to keep the debt under control in order to maintain this economic equilibrium.
This was shattered during the 2008 financial crisis, which was caused by greedy investment banks that issued and profited from toxic loans. Bitcoin was created from the fallout of the inevitable collapse that followed as a hedge against banks and their interference. However, the financial fiasco is happening again as inflation rages out of control and central banks scramble to contain it.
Raising the inflation targets
As suggested by The Economist last week, the long-term inflation target of 2% could be raised to 4%. On October 10, Circle co-founder and CEO Jeremy Allaire commented on this “new normal” in response to a cap from crypto-liquidity provider Cumberland.
According to The Economist, a revision of the target upwards to 4% will make it possible for central banks to simultaneously construct both a budgetary windfall and an exit to the impending disinflation crisis.
However, higher inflation targets are a slippery slope as it could lead to a loss of faith being seen as just another form of QE (quantitative easing). Furthermore, it causes inequality because inflation-proof investments are largely unavailable to most people, the company noted.
Capital tends to flow into assets that appreciate in these times, and they have traditionally been real-world assets such as real estate or commodities. However, a new digital asset class is now universally available to everyone, which is historic, Cumberland commented.
Positive impact on digital assets
Crypto has lost its inflation-hedging properties this year as markets have behaved more like tech stocks, losing value over the past year. However, market cycles usually last a couple of years, so a prolonged state of high inflation can be very good for digital assets.
Cumberland pointed out that crypto is more of a deterioration hedge than an inflation hedge,
“But persistent, tolerated inflation is just another form of fiat currency degradation — a backdrop against which crypto performs spectacularly.”
These characteristics can be clearly demonstrated in countries such as Argentina, Venezuela and Turkey, which have switched to crypto after their own fiat currencies were crushed.
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