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May 29, 2021
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How inflation determines our lives

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Photo by Alexander Schimmeck on Unsplash

Everywhere you look: Prices are exploding. Food, building materials, electrical appliances, electricity — everything is getting more expensive. And not just a little bit. Those who use Bitcoin escape this destructive game — and drive the decentralized monetary reform that may be needed.

Yes. Bitcoin has its weaknesses, its flaws, and its problems. The cryptocurrency consumes too much power, the price is too volatile, and scaling with Lightning continues to be rubbish.

Bitcoin may not be the perfect solution. But cryptocurrency remains the only real alternative to the fiat money system. And never has such an alternative been more needed than today. This is shown by some news of the last weeks.

At this point, one no longer knows whether to laugh or cry.

So many experts — including the ECB — were still assuring us last year that there was no inflation to fear, but rather deflation. If anything, mild inflation would still be a long way off. Institutional economists dismissed the trivial, instinctively understandable equation that a shrinking economy and a rising money supply lead to higher prices as too simple.

So now it turns out that inflation does exist, and the experts are once again surprised. But even before they have swallowed their surprise, they are already reassuring themselves with new forecasts. This time, they will certainly be right: It won’t be that bad, three, four percent inflation at the most, and that only temporarily. It is an “inflation hump,” says former ECB President Mario Draghi. It will soon level out again.

Wholesalers report “historic price premiums” for grains, corn, and oilseeds. The price of soybeans rose 80 percent, sugar 77 percent. Corn became 44 percent more expensive, wheat 22. But it’s not just food that’s driving prices in the supermarket: packaging materials such as plastic and paper became more expensive “in the high double digits.” PET plastic, for example, by 75 percent.

The situation is just as dire for building materials: The price of copper has doubled within a year. Nickel, lead, aluminum, and palladium rose by 10 percent within a single month. The first wholesalers are passing on the prices: ZEG Zentraleinkauf Holz + Kunststoff demands about five percent more for components in the window and door sector and explicitly reserves the right to further price increases.

Construction companies struggle with surcharges of 10 percent for wood and bitumen and almost 30 percent for reinforcing steel. And these are just the official figures. According to reports from carpenters, cost increases for materials of 50 percent are not uncommon, and in some cases even 150 percent for wood.

Such price increases are beginning to trickle down to the consumer: In Hamburg, for example, the social housing construction sector is complaining that the massively rising prices for building materials and land jeopardize the schedule for creating affordable housing. And in Rudelzhausen, the cost of renovating the open-air swimming pool is rising by around 7 percent. These are just examples of a development that can hardly be avoided.

Meanwhile, in Karlsruhe, the city is driving inflation when public transportation companies raise ticket prices by nearly 4 percent. But driving your own electric car is also becoming more expensive, at least in Baden-Württemberg, where EnBW is raising prices at charging stations by 7.7 cents per kilowatt-hour. The basic price — which varied between 39 and 79 cents previously — equates to up to 20 percent. It will be even more expensive for those who borrow a car. According to comparison portals, the cost of rental cars has doubled in some European countries, such as Spain, Italy, and Greece. In Germany, they have risen by only 20 percent.

The argument that electronics are deflationary no longer applies either. According to a study by Testberichte.de, the prices of webcams, printers, PCs, graphics cards, kitchen appliances, and just about all electrical appliances have risen by 20–100 percent in the past year. A study by mydealz comes to a similar conclusion.

Basic foodstuffs: 20–80 percent.
Building materials: 10–100 percent.
Components: 5–20 percent.
Electricity: 20 percent.
Electrical: 10–100 percent.
Public transportation: 5 percent.
Packaging materials: 30–80 percent.
Rental cars: 20–100 percent.

Three percent suddenly sounds pretty stable. Maybe supermarkets and landlords don’t pass on prices immediately or in full. But if the markups on staple foods and packaging materials continue, shopping will soon become significantly more expensive. And if building materials continue to be this expensive, it’s only a matter of time before rents go up too (or houses go to rack and ruin).

That’s one side of the issue — consumer goods. It is devastating when these become more expensive across the board. If wages don’t rise accordingly — and they can’t compete in an economy that is shrinking as it is currently — it effectively means more poverty for a broad mass of people.

The WELT already fears that this will make wealth accumulation almost impossible for the middle class. Those who don’t yet have assets and don’t earn very well have little chance of ever building one up—stocks at an all-time high, real estate prices beyond good and evil.

Instead, according to another article in the WELT, “a historic self-expropriation of German savers” is taking place: They are putting aside more money than ever before — but inflation is eating it up.

In itself, as “progressive” economists like to point out, inflation is nothing bad. In fact, when prices rise, and economic growth, wage increases, and interest rates on savings accounts keep pace, it can be very fruitful for an economy.

But what we have right now is a perversion of that ideal: inflation is much higher than it was then, but the economy is shrinking. Strong unions may squeeze out wage increases, but that would be more of a selfish rat race with perverse, toxic incentives: There is not enough for wage increases for everyone, and if some earn more, the others will have to pay for it sooner or later.

And, perhaps worst of all, interest rates in the bank not only fail to compensate for inflation — they are currently even turning negative. While prices are rising, the money in the account is not growing — it is shrinking.

The current situation with money is destroying the middle class.

It may be up to Corona. While Germany is languishing in a permanent lockdown and the economy continues to shrink here, to everyone’s surprise, it is picking up again in China and the US. That’s why they are buying wood, metal, paper, plastic, soy, and microchips from us.

It may also be generally because there is now a consumption-hungry middle class in China. And then there are the poor harvests, for example, in Brazil, or container ships getting stuck in the Suez Canal.

Finally, there’s the trend toward “cocooning” during the lockdown: people retreat into their homes. They’re having their bathrooms renovated, buying kitchen appliances, video cards, monitors, webcams, sports equipment.

So we have several somehow possible factors, all of which are plausible but also questionable: Hasn’t China been rising for 20 years? Aren’t there always bad harvests, for example, in the sweltering and dry summer two years ago? And shouldn’t the market be able to adjust to lockdown-inspired consumer trends?

None of the factors are new. Not even the agglomeration of factors is. So why is inflation hitting right now — and why with such unprecedented ferocity?

One important reason is monetary policy. The ECB’s expansionary monetary policy has been steadily increasing the euro zone’s money supply since introducing the euro. Compared with 2000, the money supply has roughly tripled, and since 2008 it has increased by around 50 percent. As I said, this kind of thing works well if the economy grows at the same pace and wages and interest rates can keep up. But this did not happen.

Nevertheless, it went well for a long time. The asset sphere swallowed the new money and thus prevented inflation from reaching consumer goods. As a result, little of the money glut was felt in the supermarkets. However, the high price paid was a worsening of inequality, which has now reached a level that robs the middle class of the opportunity to do what actually characterizes the middle class: build (modest) wealth.

In this situation, all it seems to have taken is a few nudges — a plague, a clogged Suez Canal, a few failed harvests — to open the plug that separated inflation from the consumer goods market. Suddenly, stocks and real estate are getting more expensive, but building materials, packaging materials, and food commodities are exploding. It is now unlikely to prevent this inflation from trickling down to the supermarket and rent.

You can put your savings in stocks, in gold, in real estate, in inventories. Or even in bitcoin and other cryptocurrencies. These promise to preserve value better over the long term and form a new monetary system that does not involve inflation.

Bitcoin is not perfect, and a complete switch from euros to Bitcoin is neither conceivable nor feasible. But with every step toward Bitcoin, you’re driving decentralized currency reform — and draining your wealth from a game, you can only lose.

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Banking · Bitcoin · Business · economics · finance
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