The following is taken from a recent edition of Deep Dive, Bitcoin Magazine’s high-end market newsletter. To be among the first to receive this and other on-chain bitcoin market analysis straight to your inbox, Subscribe now.
Last week we discussed the beginnings of a global energy crisis and the downstream effects on bitcoin mining in The Daily Dive # 069. Today, we cover the latest developments in soaring energy costs, the risks of stagflation and how these pose increased risk for a future credit crunch.
Risks of stagflation
Last month, more than 4,000 articles on the Bloomberg terminal mentioned stagflation. It is a growing economic concern in the market and we are watching closely. Stagflation refers to an economic period when inflation is rising, economic production stagnates and unemployment is high.
Historically, stagflation has often been accompanied by oil shocks. Now we are seeing the West Texas mid-size crude oil price per barrel hitting seven-year highs with a current imbalance between oil supply and demand. Along with the shortages of natural gas and coal in Europe and Asia, these factors increase the market chances of a stagflation scenario.
Amid the latest energy price hike, the Organization of the Petroleum Exporting Countries, Russia and their allies (known as OPEC +) met yesterday to decide to keep their previously agreed production offer. rather than increasing the supply further. The United States called on OPEC + to increase supply, stressing that rising gas prices pose a threat to the global economic recovery.
In the event of rising inflation, rising energy prices will affect gas prices, consumer heating bills and manufacturing production costs which can be passed on to consumers through higher prices and slow economic production. .
We can already see this trend manifested in a rise in the Chinese producer price index (PPI), up 9.5% in August, while the Chinese consumer price index (CPI) was 0.8%, showing weak purchasing demand from Chinese consumers. Chinese manufacturers may seek to pass increased costs on to consumers in the West and overseas, with demand and the CPI stronger after the pandemic. For the United States, this comes as monetary policy is poised to tighten.
What is often misunderstood is that the Federal Reserve cannot respond to today’s stagflation like it could in the 1970s, when Paul Volcker raised rates up to 20% to curb the ‘inflation. Volker might do so because of the relatively low debt levels across the economic system, but the situation today is quite different.