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How Ending 2% Inflation Targets Could Positively Impact Crypto

Finance

beincrypto.com 10 October 2022 07:20, UTC
  
Reading time: ~2 m

Central banks have used established targets to keep inflation on track, but the current economic turmoil could see them adjusted upwards. This would be bad for fiat currencies but good for crypto in the long term.

For years, central banks have used monetary policy to keep inflation on target, typically at or below 2%. Governments, meanwhile, would continue efforts to keep debts under control to maintain this economic equilibrium.

This was shattered during the 2008 financial crisis, which was caused by avaricious investment banks issuing and profiting from toxic loans. Bitcoin was spawned from the fallout of the inevitable collapse that followed as a hedge against banks and their meddling. However, the financial fiasco is happening again as inflation rampages out of control and central banks grapple to get a hold of it.

Upping inflation targets

As suggested by The Economist last week, those long-standing 2% inflation targets could be increased to 4%. On Oct. 10, co-founder and CEO of Circle, Jeremy Allaire, commented on this ‘new normal’ in reaction to a take provided by crypto liquidity provider Cumberland.

According to The Economist, revising the target upward to 4% would enable central bankers to simultaneously engineer both a budgetary windfall and an off-ramp to the impending disinflationary crisis.

However, hiking inflationary targets is a slippery slope as it could result in a loss of faith being seen as just another form of QE (quantitative easing). Furthermore, it causes inequality because investments that are inflation-proof are largely unavailable to most people, the company noted.

Capital tends to flow into assets that appreciate during these times, and they have traditionally been real-world assets such as property or commodities. However, a new digital asset class is now universally available to everyone, which is historic, Cumberland commented.

Positive impact on digital assets

Crypto has lost its inflation hedge properties this year as markets have behaved more like tech stocks, losing value over the past year. However, market cycles usually last a couple of years, so a prolonged state of high inflation could be very good for digital assets.

Cumberland pointed out that crypto is more of a debasement hedge than an inflation hedge, 

“But sustained, tolerated inflation is just another form of fiat currency debasement – a backdrop against which crypto performs spectacularly.”

These properties can clearly be demonstrated in countries such as Argentina, Venezuela, and Turkey, which have turned to crypto after their own fiat currencies were crushed.


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