As US inflation rises, Bitcoin offers hedge
The following is taken from a recent edition of Deep Dive, Bitcoin Magazine’s high-end market newsletter. To be among the first to receive this and other on-chain bitcoin market analysis straight to your inbox, Subscribe now.
As many already know, the US Consumer Price Index for October was announced yesterday morning with scorching 6.2% year-over-year growth, continuing its accelerating trend. since May 2020. It is now the fifth consecutive month with the CPI gaining more than 5%.
Let’s take a look at the equivalent landlord rent, which stands at 3.1% and accounts for almost 24% of the CPI calculation this month. This is a major factor in the rise in the CPI since May of this year. That said, there are many reviews out there about how landlord equivalent rent is calculated. When looking at other, more robust data sources for calculating rent increases, it is clear that the owner’s rent equivalent significantly underestimates current levels of rent inflation.
For example, one source of data that we can use to gauge rent inflation is monthly rental market data from Redfin which shows more than 10.5% year-over-year growth in rental prices. for the month of August. We can also take advantage of the Zillow Observed Rent Index (ZORI) which shows annual growth of 8.5% and 9.1% for August and September, respectively. These data points would argue that homeowners’ equivalent rent is far from reality. And this is only a key part of calculating the CPI.
The simple fact is that the high levels of inflation facing the United States and the global economy today are in fact a welcome sign for central bankers and policymakers. They may not say so explicitly, but the current environment of sustained high inflation coupled with 0% nominal interest rates is favorable if you are actively seeking to erode real debt levels.
As highlighted in “The Daily Dive # 077, The Decade Long IMF Playbook,” studies have shown that the way to reduce debt / GDP levels is through financial repression.
“Historically, periods of high debt have been associated with an increasing incidence of defaults or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial suppression”. Financial repression includes loans directed to the government by captive domestic audiences (such as pension funds), explicit or implicit interest rate ceilings, regulation of cross-border capital movements, and (usually) a closer link between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt-to-GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce the costs of debt. debt service while a high incidence of negative real interest rates liquidates or erodes the real value of public debt. Thus, financial repression is more effective in liquidating debts when it is accompanied by a constant dose of inflation.
-The liquidation of the public debt
It’s also worth noting that current CPI readings when calculated with the gauge used in the 1980s have almost 15% year-over-year inflation, well above the reading. of 6.2% with yesterday’s CPI measure.