October 19, 2021

Rising risk of stagflation

We recently discussed the onset of the global energy crisis and its implications for Bitcoin mining. Today we will highlight the latest developments related to the sharp increase in energy prices, the risks of stagflation and how they increase the risk of a future credit crisis.

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Last month, Bloomberg terminal addedmore than 4 thousand articles in which stagflation was mentioned. This is a growing economic problem in the marketplace and we are monitoring it closely. Stagflation refers to the period of the economy when inflation is rising, economic production is stagnating, and unemployment is high.

Historically, stagflation has oftenaccompanied by oil shocks. We are now seeing the average oil price per barrel in West Texas hitting seven-year highs at the current global supply and demand imbalance. Together with shortages of natural gas and coal in Europe and Asia, these factors increase the market chances for a stagflation scenario.

Against the background of the last sharp jump in prices forenergies The Organization of the Petroleum Exporting Countries, Russia and their allies (known as OPEC) met, deciding to maintain previously agreed production volumes rather than expand supplies further. The United States called on OPEC to increase supplies, stressing that rising gas prices pose a threat to the global economic recovery.

As for the rise in inflation, the rise in prices forenergy will affect gas prices, consumer heating bills and production costs, which may be passed on to consumers as a result of higher prices and slower economic growth.

We are already seeing how this trend manifests itself ingrowing growth in the China Producer Price Index (PPI), which rose 9.5% in August, while the China Consumer Price Index (CPI) stood at 0.8%, reflecting weak buying demand from Chinese consumers. Chinese manufacturers can look forward to shifting the increased costs onto Western foreign consumers as demand and CPI have surged since the pandemic. For the United States, this is happening at the same time that monetary policy is poised to tighten.

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What is often misunderstood is thatThe Federal Reserve cannot respond to today's stagflation the way it did in the 1970s when Paul Volcker raised rates to 20% to curb inflation. Volcker could have done this because of the relatively low level of indebtedness throughout the entire economic system, but today the situation is very different.

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With the overall ratio of domestic debt to GDP in389.2% nominal interest rates cannot be raised without disrupting the economic system, which puts Jerome Powell and the Federal Reserve in a difficult position.

This is rather paradoxical, because the currentthe setting doesn't end happily for many of the participants. The current trajectory of nominal rates is kept at zero, while real rates continue to fall with persistently high inflation rates, encouraging borrowing with increasingly lower real yields to build up debt and outpace current monetary inflation. However, the music eventually stops when a certain feedback loop occurs:

  1. Monetary / fiscal policies stimulate demand by creating credit momentum.
  2. Stimulated demand creates an imbalance in supply and demand between money and real goods and services in the economic system.
  3. Using financial engineering (leverage) to counter rising inflation.
  4. Higher inflation and supply chain lags due to monetary / fiscal stimulus reduce the rate of return for an extremely leveraged economy.
  5. Over-credited borrowers with little / no cash reserves face insolvency due to rapidly dwindling profits; default on bonds.
  6. The default affects counterparties, liquidity is withdrawn from the markets, additional players with excessive leverage face bankruptcy.
  7. Reflexive surge of volatility / liquidity crisis in the historically established financial and economic system using borrowed funds.

This is a series of events that take place inthe result of a centrally planned monetary system and cost of capital, and by all accounts we are in the middle stages of the cycle. Central banks and governments will try to continually delay making an important decision until later, but the question every investor should ask is this:

With the Fed constantly engaging (nationalizing losses) in the markets, how will the game ever end?

The answer to this question can be as prettycomplex and very simple. The game ends with the deterioration of the credit quality of all balance sheets in the global economic system. After all, in 100% fiat, a debt-based monetary system, money is created by lending and destroyed by repayment and default. When the entire global economy becomes as systematically over-leveraged as it is today, the risk becomes a decline in the credit quality of fiat as an asset.

Simply put, the risk of owning debt securitiessecurities have never been higher, but the remuneration (profitability) for owning these securities has never been lower. High risk, infinitesimal profitability.

The other side of this deal? Bitcoin.

Non-sovereign, decentralized, globala capital repository created with a finite-digit supply proof-of-work algorithm with hard constraints and difficulty adjustments to algorithmically limit over / underproduction. It is the most reliable asset the world has ever seen, and in the ever-increasing economic uncertainty, Bitcoin is the best choice.

BitNews disclaim responsibility forany investment advice that this article may contain. All the opinions expressed express exclusively the personal opinions of the author and respondents. Any actions related to investments and trading on crypto markets involve the risk of losing the invested funds. Based on the data provided, you make investment decisions in a balanced, responsible manner and at your own risk.

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