In this article, we will explain inflation and how you can be protected against it with Epsylon.
What is inflation?
Inflation represents the extra money that is needed to live the same as the previous year (or any other period to which the inflation data refers).
For example, if a year’s inflation is 4%, it means that 4% more money is needed to live the same as the previous year. If your cost of living this year is 10,000 USD you will need 10,400 USD the following year to live the same as you did the previous year with 10,000 USD.
If the second year you continue to live with 10,000 USD, you will live 4% worse, that is, you will have to cut back on some expenses because you will not have money to do the same things as the previous year.
Small differences in the short term mean important differences in the long term:
As can be appreciated a 5% Inflation is devastating in the long term.
- The lower the inflation, the more stable the economy is and the more wealth is created as a result of that stability.
- High inflation particularly affects those who have the most difficulty in increasing their income, who often are the poorest.
The best scenario for inflation is as close to zero as possible. Price stability helps the economy grow, protects jobs, and gives citizens confidence that their money will be worth the same tomorrow as it is today.
Hyperinflation is very high and typically accelerating inflation. There have been several cases of hyperinflation throughout history. One of the most known is Germany after World War I.
In 1922, Germany had to pay war reparations to the victors of World War I. Also, France had occupied Germany's most powerful industrial centers. In this context, the government printed more money in an attempt to get their economy working. The printing, combined with the reduction of the productive capacity of the nation, tanked the value of the German Mark.
In 1923 the country’s daily inflation rate rose to 21%. Prices were doubling every 4 days. The monthly rate shot up to 29,500% in the following months. In January, a slice of bread cost 250 marks. In November, its price was 200,000 million marks.
Venezuela is the only economy in the world in hyperinflation at the moment. The Government has financed the fiscal deficit of the State accounts through the issuance of inorganic money. The creation of currency growth to 5000% in 2019. The issuance of the banknote itself, the ink, and the security mechanisms to print them is more expensive than the value of each piece.
Currently, there are other countries facing Inflation issues as well:
We need to make DeFi accessible to these 1.4 billion people leaving under big inflation. That is Epsylon's purpose.
Purchasing Power USD
The lack of a currency backed by gold or something similar (BTC) independent of a political decision implies that it will depreciate permanently versus actual assets. It has always been like this and it will keep happening.
Government pressure to depreciate the currency is permanent.
If the amount of money in circulation keeps stable, the natural state of an economy is deflationary. The increments of productivity allow producing more goods with the same money.
This is positive for the consumer, benefiting from the continued decline relative prices versus wages, as has been happening with computers or TVs.
Deflation does not suit indebted Governments. In that situation, debt remains stable, but money is worth more as you can buy more things with it. Therefore, it costs more effort to repay that debt.
Inflation, on the other hand, facilitates the repayment of debts, but high inflation damages the economy because it leads to continuous price rises that make investment ideas difficult to succeed, which ends up destroying jobs.
- Inflation is a direct consequence of the decisions of politicians.
- Interventionism, bureaucracy, high taxes, etc. drive up inflation.
Central Banks commonly agree in a symmetric inflation target of 2% in the medium term, which means that positive or negative deviations from this target are just as undesirable.
2020 Covid Stimulus & 2021 Inflation
In life, every action has a consequence, and an unprecedented stimulus program, financed by the creation of money through an exponential increase in the money supply, will have consequences.
The US government has been printing massive amounts of new money. On January 6, 2020, the US Federal Reserve had around $4 trillion. On January 4, 2021, the number increased to $6.7 trillion.
However, since there is no productivity (goods and services) to back up the trillions of dollars currently in circulation, printing more money doesn’t increase the economic output (productivity), it only increases the amount of money circulating in the economy.
Too much money in circulation chasing the same amount of goods leads to inflation.
The impact of inflation can also be seen in stocks and cryptocurrencies.
As we mentioned before, citizens need to have the confidence that their money will be worth the same tomorrow as it is today. Therefore, several consumer strategies have been applied to camouflage inflation:
- The size of the product becomes smaller while the price remains the same.
- The package looks big, but when you open it, it is far less than anticipated.
The public is willing to go along with these changes instead of complaining about them because they only concern themselves with the price of something and not the value per dollar.
Nevertheless, the increase in raw materials and energy prices, combined with the supply chain crisis and semiconductor shortage, has affected most of the goods, causing a general rise in prices.
Nowadays inflation is really visible.
Will the History repeat?
After a global flu pandemic in 1918 & 1919, and a depression that tanked the economy in 1920 & 1921, the United States entered into a decade of unprecedented growth and prosperity, the Roaring Twenties, from 1922 until 1929.
The American way of life was exported all over the world, founded on the individual consumption of goods (cars, telephones, household appliances), driven by advertising, and supported by easy credit.
New sources of energy were introduced (electricity & oil) and new sectors were born such as the chemical, steel, or automotive sectors.
Are we going to experience some “Roaring Twenties” in this Decade? 🤔
- Both were preceded by a global pandemic. (Spanish flu vs Covid-19).
- The depression in 1920–21 was short, about 18 months. (Let’s see in the following months).
- In 1920, the Interest rate reached 7%. (In 2021 we have reached 5%).
- Big technological advances in the 1920s. (Energy, Autos, Appliances, etc vs Blockchain, AI, Autonomous driving, etc).
Inflation Hedge with Epsylon
When it comes to investing the breaking point between winning and losing, is inflation. Any return that is obtained below inflation represents a real loss.
Epsylon can be used as an Inflation hedge.
- Most of our products are based on a Stablecoin, USDC.
- The yield generated through our platform overcomes Inflation.
Epsylon offers a set of simple curated vaults that match users’ risk profiles and maximize their returns:
Yield Farming 🚜
Vaults are capital pools that regularly generate yield based on opportunities present in the market. Vaults benefit users via socializing gas costs, automating yield generation, and rebalancing processes.
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