In order to keep inflation under control, central banks have employed predetermined targets, but the current state of the economy may require them to be raised. Long-term, this would be detrimental to fiat currencies but advantageous to cryptocurrencies. Aiming to control inflation at or around 2%, central banks have deployed monetary policy to do so for years. Governments would continue their efforts to keep debt levels in check in order to preserve this economic equilibrium.
Those long-standing 2% inflation targets might be raised to 4%, as The Economist recommended this week. Jeremy Allaire, co-founder, and CEO of Circle commented on this “new normal” on October 10 in response to a viewpoint offered by cryptocurrency liquidity service Cumberland. Jeremy tweeted while referring to the idea presented by the Economist:
“Love this take. 4% is the new normal. That’s the likely exit for govt’s. Watch closely in Feb/March for this.”
The central bankers would be able to provide a fiscal windfall and a way out of the impending disinflationary calamity by boosting the objective to 4%. However, raising inflationary targets is risky, as it can make people lose faith in them and be seen as just another form of quantitative easing. Because the majority of people lack access to inflation-proof investments, it also leads to inequality.
The CEO opined that during these periods, money tends to flow into assets that appreciate, which historically have been things like real estate or commodities. However, a new, historically significant class of digital assets is now widely accessible to all.
Due to markets behaving more like tech stocks and losing value over the previous year, cryptocurrency has lost its ability to act as an inflation hedge this year. However, as market cycles often last a few years, a protracted period of high inflation can be beneficial for digital assets.
Cumberland says crypto is more of a debasement hedge than an inflation hedge. ‘Sustained/tolerated’ inflation is just another form of currency debasement, and crypto tends to perform exceptionally well in such a situation. This can be experienced in South American countries like Argentina and Brazil and MENA (Middle Eastern and North Africa) countries like the Republic of Congo, Namibia, and Turkey.