TD₿: Bitcoin and the True Meaning of Inflation by Steven Lubka
TL;DR Bitcoin protects investors from a rapid increase in the money supply, not the disruption of the actual supply of resources in the economy.
Hey Bitcoiners,
This morning CPI inflation once again exceeded forecasts when it came in at 9.1% YoY, the largest gain since the end of 1981.
When we take a closer look at the data, it gets even more troubling. Grocery prices have increased 12.2% YoY, and record-high gasoline prices have increased nearly 60% YoY. The cost of essentials like food and fuel is getting much more expensive for Americans.
Bitcoin is often touted as an inflation hedge, so many investors are scratching their heads as to why its price continues to struggle in this environment. It starts with asking yourself, “How does one define inflation?”
Consumer price inflation is one way to describe inflation. Consumer price inflation is a lagging indicator and can be caused by disruptions in the actual supply of goods in the economy, which consequently drives up their prices. However, there is another way to define inflation...
Monetary inflation is the expansion of the money supply at the hands of central bankers. When central banks dilute the money supply by creating more money, there are more dollars in the economy to chase a finite amount of resources. Eventually, this shows up unevenly in the economy via a rise in consumer prices.
When we look at a chart of the rate of change of the M2 money supply, one can observe how it shot up when the Fed created a massive amount of money in response to COVID-19 and now has dropped into negative territory as the Fed has started to tighten.
Bitcoin’s price has moved in tandem with the expansion and contraction of the money supply. In other words, Bitcoin has acted as a hedge against monetary inflation, not consumer price inflation.
Swan’s Steven Lubka wrote this article that looked into how to think about the true meaning of inflation and Bitcoin. (07/11/2022)
Bitcoin continues to act as a hedge against the profligacy of central bankers, and at the moment, these central bankers are contracting the money supply. When they eventually resort to expanding the money supply again, I believe we will see this change reflected in the price of Bitcoin once again.
Tick tock next block,
Cory Klippsten
Sign up for Swan and receive $10 in free bitcoin today.
Quote of the Day
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” - Milton Friedman, Economist
Job of the Day
Interested in building infrastructure for a Bitcoin Standard? Then you belong at Hoseki. They are currently looking for a Backend Engineer to help them on their mission.
Not your particular skillset? Check out all the Bitcoin jobs at bitcoinerjobs.com.
Event of the Day
Tonight — Conor Okus is sharing insights into how Bitcoin and other open source development project funding works in London from 7:00-8:30 pm.
Not in town for this? Check out all the Bitcoin events at bitcoinerevents.com.
Meme of the Day
