This is opinion editor Federico Rivi, a freelance journalist and author of the Bitcoin Train newsletter.
We are raising interest rates because “we are fighting inflation. Inflation has practically disappeared.” The president of the European Central Bank, Christine Lagarde, said this on the Irish talk show “Late Late Show” on October 28, 2022. The words apparently contradict a statement made shortly after in that interview. inflation, he said“It is related to Russian President Vladimir Putin’s war in Ukraine. […] “This energy crisis is causing massive inflation, which we must defeat.”
Rate increase
A day before the interview, the European Central Bank raised interest rates by another 75 basis points, bringing the total increase over the last three meetings to 2%: the highest level since 2009. Most likely, it will not end there. The Governing Council plans to “raise rates further to ensure a timely return of inflation to its medium-term target of 2 percent.”
According to the latest data, price growth in the euro zone reached a level not seen in the last 20 years: +9.9% in September compared to the same month last year. In countries such as Latvia, Lithuania and Estonia, price increases of 22%, 22.5% and 24.1% are observed, respectively.
In the widespread consensus on the meaning of the term inflation, however, there is a huge discrepancy. A distortion of the real concept that leads leaders, pundits and ultimately the media to attribute different reasons to the word depending on the convenience of the moment. When the cause is, in fact, always and only one.
Inflation and Price Increases Are Different
For many, inflation is now synonymous with price increases. This is not only a widely held belief, but also a meaning adopted by economics textbooks and official language. According to the Cambridge Dictionary, inflation is “a general, sustained increase in prices.”
But is it really so? Bitcoin teaches one thing: Don’t trust, check. And upon inspection, a problem emerges: the reversal of cause and effect.
Inflation is perceived as the effect of a certain event: an energy crisis, a chip shortage, a drought can cause the price of goods and services to rise in certain sectors. But in reality, inflation does not mean a price increase in its original sense, but shows its cause.
The clue comes directly from the etymology: inflation comes from the Latin word inflationis itself a derivative flare upI mean for exaggerate. Consider inflating a balloon: action flare up (to inflate) is to blow air into a balloon through the mouth: caus. The immediate result is an expansion of the balloon’s volume in the air: impact.
Injecting new air into a balloon is the action that causes it to expand. The same reasoning applies to money: the very act of printing money is inflation, and the result is an increase in prices. This reversal of cause and effect was already referred to in the late 1950s semantic confusion By Ludwig von Mises, one of the most prominent economists of the Austrian school:
“At present there is a very reprehensible, even dangerous, semantic confusion which makes it extremely difficult for the layman to grasp the true state of affairs. Inflation, as the term is always used everywhere and especially in this country, means an increase in the amount of money and notes in circulation and the amount of bank deposits to be checked. But today, people use the term “inflation” to refer to the phenomenon that is the inevitable result of inflation, that is, the tendency for all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to express the cause of this increase in prices and wages.”
So, while price rise can have many causes, inflation cannot have so many reasons because it itself is the origin of price rise. It would be more adequate and intellectually correct to say that the decline in purchasing power can be the result of several factors, including inflation, i.e. money printing.
Floods of money
So, how has the European Central Bank behaved in recent years regarding money issuance? The most effective figure to understand this is the ECB balance sheet, which shows the opposite value of assets held: assets that Eurotower does not pay for, but acquires by creating new currency. As of October 2022, the ECB holds approximately €9 trillion. Before the pandemic, it had about 4.75 trillion euros at the beginning of 2019. Frankfurt has almost doubled its money supply in three and a half years.
If we measure the amount of euros in circulation in the form of banknotes and deposits – this figure is defined as M1 – the figure is a little more convincing, but not much: at the beginning of 2019 there were almost 8.5 trillion euros in circulation, today it is 11.7 trillion. An increase of 37.6%.
Money Supply in the Euro Area M1. Source: Trade Economics
Are we really sure that this price increase – or inflation, as everyone wrongly calls it – comes from nowhere? Or is it the result of the war in Ukraine? Given the amount of money that has entered the market over the past three years, we should consider ourselves fortunate that the average price increase of goods and services still remains at 10% due to the restrictions of the pandemic and the subsequent economic crisis. they enter.
What does Bitcoin have to do with all this? Everything is with Bitcoin because it was born as an alternative to the economic disasters that central banks keep themselves responsible for. An alternative to unsustainable growth bubbles replaced by destructive crises caused by market manipulation of interventionist utopia. Bitcoin cannot tell the world thatinflation came out of nowhere,” because its code is open and anyone can check the monetary policy. A policy that cannot be changed or manipulated. It is stable and will remain so. 2.1 quadrillion satoshis. No more.
This is a guest post by Federico Rivi. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.