Part I – Inflation
A couple of weeks ago I wanted to write an article about whether or not the world economic sector will have a crisis in the near future and how it will play out. I first thought it would be a short analysis about inflation[1] and the stability of some currencies. I was also prepared to do some research on the balance between the capital (money or other type of asset[2], typically used for investing) and the actual economy (as it is experienced, wages, cost of living, etc.) but what I didn’t consider was the rabbit hole awaiting me on the other side of the screen. Now, I will explain it as best as I can starting from the main ‘perpetrators’ – inflation and stability.
Firstly, I want to make something clear. That is the current vulnerability of the economy in the context of crypto[3] and people making unnecessary investments in terms of spending money on rather irrelevant things. Let us take a look at the US for example. In California alone people have invested more than 4 billion dollars monthly on memes – a booming industry in today’s world. If we multiply this amount of money by the number of states for the course of one year this leaves us with about 2,5 trillion dollars spent on memes. Now, for good measure, let us add the total value of all cryptocurrencies which is about the same as the total number above. Adding both makes an estimated figure of 5 trillion dollars. This may seem like a lot. Yet if we compare it to the total amount of yearly assets of the United States – 270 trillion dollars – we can see that the previous number is not that significant. That is because the capital is widely distributed in a range of different sectors. On one hand, this is not ideal because a crash in any industry may have consequences for the whole country due to the connections between the industries. On the other hand, the diffusion of investments throughout more businesses further secures the overall stability, for the reason that high pressure in one sector often doesn’t affect any other sectors. This allows not only for the US-dollar but also for many more major currencies to be stable.
Since it is quite challenging to find a good explanation for the meaning of the term “inflation”, many people lack understanding. Inflation is when the currency loses purchase value and prices increase. Something that not many people are aware of is the fact that inflation has many positive aspects. When inflation is mild people buy more products before they become more expensive and this boosts short-term-production of goods. Investors on the other hand, think that prices will continue rising and invest even more in a certain sphere creating more jobs. Both these factors contribute to a country’s economic development. This explains the linkage of inflation to the economic growth in most countries in the 21st century. In general, inflation is good for the people receiving loans and bad for the people who have money in the bank and loan out money. It is also neutral for investors because the value of the investment changes to match the value of the currency.
Furthermore, it is important to state that in most cases inflation is better than deflation[4]. Historically speaking, the Great Depression (1929-1933) happened when there was an overall 10% fallback on prices because of economic growth in the US and a crash in investments. In that case the economy grew but reached a high point since people couldn’t use all the products they produced. One way to deal with that is to export the produced commodities but the US didn’t. In that case, mild inflation was followed by deflation due to cutbacks on demand. This left millions of people jobless. So, the US’s handling of deflation caused the crisis.
As a matter of fact, the increasing inflation of the currencies in the last decade only proves the point that little inflation is advantageous if handled right.
We are yet to see what is going to happen with the world economy. It’s just a matter of time when the next great opportunity to generate capital will come along. So, stay tuned for part two of my analysis.
Krassimir Mitrev, 10. Klasse
[1] inflation – when the currency loses purchase value and prices increase
[2] asset – an item of property, regarded as having value
[3] crypto/cryptocurrency – a digital currency (example: Bitcoin)
[4] deflation – when prices fall. In such situations people wait to see if the prices can go any lower and therefore cut on spending which cuts back demand
Sources:
(5939) We’re Going to Have Another Great Depression. – YouTube
(5942) WHATIFALTHIST IS WRONG ABOUT THE ECONOMY AND HERE’S WHY… – YouTube
(5939) The Crisis of the 21st Century. – YouTube
What You Should Know About Special Drawing Rights (SDRs) – The Daily Reckoning
The Fed – U.S. Reserve Assets, September 2021 (federalreserve.gov)
Assessing the Role of the United States in the World – Carnegie Endowment for International Peace
Infographic: How Many U.S. Dollar Bills Are There in Circulation? (visualcapitalist.com)
What You Should Know About Special Drawing Rights (SDRs) – The Daily ReckoningWhy Inflation Is Good: 2 Reasons With Examples (thebalance.com)
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