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Stagflation is an economic concept that combines slow economic growth with increased living costs. For many years, economists have claimed that the laws that govern the economy make stagflation impossible. But economic shocks throughout the past century have demonstrated that stagflation actually poses a threat to the world economy.
In the past year, the Consumer Price Index (CPI), which assesses the average price change over time, has risen by 7.5%. Since 1982, this marks the biggest inflation rise. Additionally, both major and small economies are experiencing a standstill in annual growth. Stagflation is consequently a hot topic of discussion among investors and economists. So if you’re also curious about stagflation and its impact on the Crypto market, keep reading!
What is stagflation?
Simply put, stagflation is an extended period during which an economy faces high unemployment rates, consistently rising inflation, and stagnant aggregate demand. During this time, central banks encountered a zugzwang situation in which the monetary tools intended to combat increasing inflation instead caused higher unemployment and decreased economic production.
What causes stagflation?
There are numerous theories for why stagflation takes place. One such theory is that a sharp rise in oil prices and the accompanying drop in production lead to higher pricing for products and services and a rise in unemployment. Additionally, several economists agree that poor economic policies contribute to stagflation.
Despite the consensus, these theories frequently fall short of describing why stagflation happens. Stagflation is a poor economic phenomenon since it contradicts conventional economic principles. For instance, economists anticipate increased unemployment correlating with weak economic growth but not a price rise. Rising unemployment consequently results in decreased consumer purchasing power.
Stagflation, according to experts, is a bad situation for any economy. It poses a range of difficult economic choices for policy-makers around the world. Unfortunately, there aren’t many options besides printing more money while trying to boost growth, avoid tax increases, and address a problem in the cost of living. Having said that, increasing the money supply is merely a short-term solution for a much bigger issue.
Impact of stagflation on the Crypto market
Since Cryptos are a comparatively new concept, it’s difficult to deduce whether investing in Crypto during stagflation can be considered good or not.
To understand whether investing in Crypto is profitable during stagflation, one can examine how traditional markets act during inflation or stagflation and why. Stagflation is terrible for traditional markets by nature. Since Crypto markets and general indexes have a strong correlation, it is possible for negative sentiment to spread across the Crypto space, which are virtual assets managed by Cryptographic algorithms.
Investors who place their money in traditional assets are typically more likely to be able to withstand economic downturns than those who invest in Cryptos, which are more volatile in nature. Thus, demand for Cryptos may be lower than usual during stagflation.
Stagflation may hurt the Crypto sector since it discourages individual investors from purchasing digital assets. Furthermore, since Crypto is regarded as a riskier investment, excessive inflation directly affects how much money people want to spend on it.
However, depending on the Crypto investment strategy, a person can decide to invest in these assets rather than traditional financial instruments. Unlike fiat currencies, which are based on a specific nation’s monetary policy, Cryptos operate on a blockchain. Investors can still profit from gains made through Crypto investments when inflation increases in one nation but not another, even if their home currency depreciates as a result of inflationary forces.
How to fight stagflation?
To combat stagflation, the government can use monetary, fiscal, and other policies to boost economic growth. Crypto may potentially turn out to be a valuable tool on its own.
The first tool is fiscal policy. One can lower taxes or increase government expenditure through an inflationary fiscal policy to boost the economy’s overall growth. Government spending can be reduced to help lessen the demand for goods and services, which could help to reduce inflation.
Monetary policy is the second tool, which aims to stimulate the economy by manipulating interest rates. Central banks employ low-interest rate policies to reduce the cost of borrowing funds. Interest rate policy can also lower the amount of money in circulation to reduce the money supply, which will eventually help to increase economic growth.
The third tool attempts to lower unemployment with active labor market policies. In this instance, the risk of “built-in inflation,” which is the demand for wage rises in the labor markets to keep up with the rising cost of living. However, this frequently leads to businesses raising the cost of goods and services to cover rising wage costs.
Cryptos may also directly contribute to the fight against stagflation by making it possible for everybody to engage from anywhere in international trade without having to visit a bank or other financial institution. People’s improved access to global markets can contribute to an improvement in the state of the world economy and more sustainable global growth.
Stagflation has consequences that can be seen worldwide in the stock and asset markets. This also applies to the Crypto market. Stagflation, though, might provide an opportunity for Cryptos to separate from stocks if investors are unable to make money in conventional markets. If this is true, stagflation can lead traditional investors to look at Cryptos as a potential replacement for unyielding stocks.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.