Stagflation refers to an economy with a high unemployment rate and substantial inflation. Why stagflation confirms its presence, it remains unclear whether investing in crypto is a lucrative decision. Meanwhile, let us find out more in this article.
Stagflation is an economic state comprised of inflation, slow economic growth, and high unemployment. Such a confluence challenges policymakers since addressing one issue can worsen the other. The phrase first surfaced during the 1973-75 recession.
Slowed economic growth, inflation, and increased unemployment are ingredients of stagflation. The chances of aggravating one of them make it challenging for policymakers to manage such a situation.
The terminology revived in the US during the 1970s oil crisis, which welcomed a recession that saw five consecutive quarters of declined GDP growth. Inflation doubled to hit double digits between 1973 and 1974. Meanwhile, the unemployment rate had hit 9% as of May 1975.
Economists used a misery index to highlight the stagflation effects. The index, which is the addition of the unemployment rate and inflation, assessed how stagflation impacted the citizens of a country.
Stagflation was once an impossible thing. It wasn’t in economic theories that dominated policy and academic circles for most of the twentieth century. The models had portrayed macroeconomic policy as an inflation-unemployment trade-off in Phillips Curve’s economic theory – which developed in the Keynesian economics context.
Meanwhile, the Keynesian economics surge and the Great Depression had economists worried about deflation dangers. Moreover, they stated that most strategies to lower inflation tend to heighten unemployment and vice versa. Inflation has confirmed resilience even during negative or sluggish economic growth. Each declared US inflation over the last 50 years has seen a constant, annual uptick in consumer prices.
What Triggers Stagflation
The stagflation causes remain a highly contested theme among economists. That’s because, before the 1970s stagflation, the Phillips Curve suggested that inflation and unemployment were inversely correlated. Nevertheless, economists have established various theories that explain why stagflation materializes.
- Supply Shock
The supply shock hypothesis suggests a sudden decline in services or goods supply triggers stagflation. Price uptick because of this catalyzed declined profit margins for businesses and slowed economic growth.
- Bad Financial Policies
This theory suggests that poor economic decisions generally welcome stagflation. Central banks and the government frequently make bad financial policies when managing the economy. For example, the 1946 Employment Act had the United States focused on increasing employment, which unintentionally heightened inflation and affected growth negatively. Other factors that can welcome stagflation include demand-pull, cost-push, and differential accumulation.
Stagflation Impact on Crypto Markets
We may have to assess how conventional markets react and why amidst inflation to understand whether cryptos do well during economic stagflation. Stagflation isn’t lucrative for traditional markets, and considering the high correlation between cryptos and indexes, pessimistic sentiment might spread to cryptos.
Generally, traditional investors can be ready to ride out economic uncertainty periods more than crypto investors (due to higher volatility). Consequently, cryptocurrencies could see deteriorated demand during stagflation.
Moreover, stagflation can hurt crypto by discouraging retail players from buying virtual assets. Furthermore, high inflation detects how much individuals can spend to acquire crypto, with most escaping riskier products.
Investors always look for approaches to secure their holdings from stagflation, especially in nations that see hyperinflation (Argentina or Venezuela). Hyperinflation is when the costs of essential services and goods soar faster and uncontrollably.
Here, crypto is beneficial as they present alternative payment options and protection against hyperinflation amidst stagflation. Some individuals divert part of their savings into BTC to escape hyperinflation.