Investing one’s surplus money to beat inflation and preserve purchasing power has become a full-time job in 2022. Equities, Bitcoin BTC , cryptocurrencies, and bonds have all failed to address the problem of inflation, which is fast eroding the purchasing power of savings.
Converting savings to hard assets, which appear to be gaining at a similar, if not faster, rate than inflation, appears to be the only method to preserve purchasing power in 2022. In this high-inflationary environment, tangible assets such as land, property, and commodities are acting as safe havens.
The significant increase in the price of hard assets reveals a broader issue with global economies. That is, polarization in the economy. This refers to the problem of inequality in which the 1% possess the majority of the hard assets that the 99% must continue to pay for.
During the pandemic (2020–2022), most economies employed the trickle-down economics rationale to distribute stimulus packages, which resulted in new money being pushed to banks and other financial institutions in exchange for mortgage-backed securities and bonds. These institutions were unable to invest the new funds efficiently in economic units that were still subject to COVID-19 constraints. As a result, they purchased more hard assets, knowing that the new money would cause inflation.
As the pandemic restrictions were relaxed, the employees who supported the economy returned to work in a completely different set of circumstances. The market for hard assets had become more polarized, and prices had risen. Higher petrol prices, higher shipping costs, higher food prices, and higher housing expenses surrounded the post-pandemic world, and now interest rates are rising, eating away at the remaining disposable income through higher debt payments.
MORE FOR YOU
As a result, people are forced to work harder, longer hours, or quit their employment in search of better-paying opportunities in order to retain their standard of life as it was prior to the pandemic. This has resulted in “The Great Resignation” in the United States, with the consequences extending to other economies. The goal of owning a home, a hard asset, has gone further out of reach.
Central banks are reacting to increasing inflation by suffocating demand in their own economies. Interest rates are being raised to do this. Higher interest rates increase the cost of credit, causing more money to be diverted to loan repayments rather than demand. The average household will devote more of their income to debt repayments, leaving them with less spare cash to spend on already expensive consumer goods.
The central banks are doing this since they cannot increase the supply of hard assets such as land, property, and commodities. Scarcity breeds irrational behavior, so we should expect to see more governments hoard hard assets in the future to secure self-sufficiency. This includes everything from food to agricultural supplies to semiconductors. This could lead to even more polarization and price acceleration, making it difficult for the average household to make purchasing decisions.
If the situation gets worse, governments will be forced to print more cash in the form of a universal basic income (UBI). This new money may be distributed using a bottom-up rationale to make sure the average household can afford the basics such as food, housing, and healthcare. The rich 1% will get richer, while the poor 99% will get poorer. So, how does Bitcoin solve this?
First and foremost, Bitcoin is a commodity and a hard asset. It is difficult to mine or obtain, and there is a limited supply. Its price, like that of other physical assets, is determined by the dynamics of supply and demand. As a result, it’s an excellent asset for storing value and protecting it from currency devaluation.
As corporations continue to add Bitcoin exposure to their portfolios, demand for Bitcoin may push the price substantially higher to match fiat inflation, and possibly even higher given the hard cap on Bitcoin supply. Bitcoin may become polarized as well. The difference is that the polarization phase is still in its early stages, so most individuals, households, and small businesses have a fair chance of purchasing this commodity before the institutions.
Everyone wants to get their hands on high-demand hard assets like real estate, land, energy, food, and shipping equipment. However, recent events in Turkey, Ukraine, and Canada have highlighted the need for a currency that cannot be manipulated or confiscated by the government on a transactional level. People in emerging economies have been compelled to explore a harder currency that cannot be rationed or devalued as a result of the massive movement in exchange rates between the US dollar and foreign currencies. Bitcoin is gaining traction as a currency that can help individuals deal with the problems that fiat currencies and traditional financial systems have.
It’s important to remember that Bitcoin remains highly correlated with equities, and if that correlation breaks in the next two quarters, it’ll be a sign that Bitcoin is evolving into a store of value rather than merely a transactional currency.
Disclosure: I own bitcoin and other cryptocurrencies.