Stagflation and Cryptocurrencies: Bad for the Economy, Good for Mass Adoption

Over the past few years, up to and including 2021, the cryptocurrency market has mostly expanded thanks to massive infusions of fiat money resulting in speculative growth. But from this point forward, crypto is about to ride the wave of the latest economic crisis, the so-called “stagflation”, and show growth predicated on the mass adoption of cryptocurrencies.

According to JPMorgan researchers, in the first month of the war between Russia and Ukraine, fixed-income assets in emerging markets lost 6 to 9% of their value. The unease about the conflict and its impact on world energy and food prices had a chilling effect on the financial markets. “A month of war has accelerated existing trends and exposed vulnerabilities,” a JPMorgan research note said. The investment bank experts concluded that while major metal exporters such as South Africa, Chile, and Peru could still do well, overall fixed-income assets in emerging markets were now on a more “stagflationary” trajectory.

The dreaded word – “stagflation” – is a portmanteau of “stagnation” and “inflation”. It describes a situation in which the economic downturn or depression, represented by stagnation and rising unemployment, are combined with price growth – inflation. In other words, the exact state the world economy is descending into right now.

Peter Nagle, Senior Economist at World Bank Group, claimed that the war in Ukraine dealt a severe blow to commodity markets, changing global patterns of trade, production, and consumption in a way that will keep prices at historically high levels at least until the end of 2024.

Nagle noted that the sharp rise in commodity costs following the invasion of Ukraine “largely reflects the fact that both Russia and Ukraine are major commodity exporters”. “But even before that, we saw prices go up as the economy was coming back after COVID-19 lockdowns. Now we are noticing wide-ranging price inflation for both energy and food, which is starting to have very large economic and humanitarian effects,” the expert warns.

The World Bank predicts that the Russo-Ukrainian war will cause the biggest global commodity shock since the 1970s. Their latest forecast says the disruption caused by the conflict will fuel huge spikes in costs for things ranging from natural gas to wheat and cotton. According to the organization’s economists, energy prices will rise by more than 50%, leading to higher bills for households and businesses. Europeans will be hit the hardest, as the costs of natural gas for Europe will more than double. According to projections, it will take about two years for the prices to lower, but even then they will be 15% higher than last year.

Over the past two years, the increase in energy prices has already been the most significant since the 1973 oil crisis. The costs of food products, produced in large part by Russia and Ukraine, as well as for fertilizers, which use natural gas, demonstrated peak growth since 2008.

Due to disruptions in trade and production caused by the war, Brent oil will average $100 a barrel in 2022, the highest price since 2013 and more than 40% above the 2021 marker. In 2023, it is expected to drop to $92, well over the five-year average of $60 a barrel. Coal prices are about to go up by 80%, reaching an all-time high.

The same World Bank Group forecast indicates a potential 40% increase in the cost of wheat in 2022, another crucial commodity of Russia and Ukraine. Together, they account for about a quarter of world wheat exports, but the war affected the production, particularly in Ukraine. This price spike is especially painful for the Middle East and North African countries that receive a large portion of their wheat from Russia and Ukraine.

 “For the average consumer, this means paying more at gas stations and grocery stores. We’re particularly worried about the poorest households since they spend a larger share of income on food and energy, so they’re particularly vulnerable to this price spike,” Peter Nagle emphasized.

But do not think that stagflation only concerns developing countries and Europe. The US was also hit by the crisis, as the country’s GDP unexpectedly fell by 1.4% in Q1 2022. This despite the fact that economists previously predicted a 1.1% growth.

The Fed has scheduled two interest rate hikes of half a point each for May and June. With 7-8% inflation, the real rate is still negative, but even then, the US economy continues to shrink.

In the previous decade, the FRS and other central banks of developed countries came to believe that a negative real interest rate – in other words, an influx of cheap money – was enough for at least an acceptable GDP increase within the 1.5-2.5% range. However, this rule doesn’t seem to apply anymore – easy cash alone is not enough to ensure growth.

Obviously, one of the main reasons is worldwide inflation charged by the commodity supercycle. It causes real incomes to go down, thus hurting consumption – an essential component of developed economies’ growth. It gets exacerbated by the fact that military warfare in Ukraine and sanctions against Russia leave no path to reducing commodity prices – unless China becomes mired in coronavirus lockdowns and reduces its demand for the entire line of items – from energy to metals and grains. But this would also signify the weakening global economy.

What does all this mean for cryptocurrencies? First and foremost, we see the global financial system weakening. With the rising cost of basic necessities like food and fuel, people and businesses are less and less willing to pay taxes, comply with currency and customs restrictions, and deal with high commissions for banking services and various indirect taxes. As a result, the demand for cryptocurrencies will dramatically increase precisely in the role that Satoshi Nakamoto envisioned for Bitcoin – as a means to conduct financial transactions past state and bank control.

It is unfortunate, of course, that our system needs an economic crisis in the form of stagflation to spur on mass crypto adoption. In the past few years (especially in 2020 and 2021), we have seen injections of fiat money stimulate the speculative growth of crypto. But now, the opposite is true: the decline of fiat in a stagflationary economy will contribute to the global adoption of cryptocurrencies. In other words, the process we have been observing for a couple of years in Latin America and Africa will be reflected worldwide.