People complain about cryptocurrency volatility.
But the “average” annual inflation rate of a fiat currency is 9.5 trillion %.
Obviously, there’s a trick to these numbers. That headline number is so high as to be essentially meaningless. And, if you were living with that level of inflation, you probably would have noticed it by now.
Almost all of the number in the (admittedly dishonest) headline comes from the 1946 Hungarian hyperinflation. That hyperinflation was so high, that when you average it over 65 other years and across 69 other countries, you still get 9,500,000,000%. In their study of hyperinflationary incidents, Steve H. Hanke and Nicholas Krus estimated Hungary’s level in 1946 at 4.16x10¹⁶ percent.
This average also omitted Zimbabwe in 2008. The source I used (the data series made available by economists Carmen M. Reinhart and Kenneth S. Rogoff) only shows a blank space for that year, but Hanke estimates the inflation rate of 89.7x10²³ percent in November of that year.
So, for a more realistic reading, we’ll leave out both numbers. When we do, we see an average inflation rate, across 70 countries, from 1946 to 2010 of 38.6%. At 38.6%, the purchasing power of the paper in your pocket is cut in half every two years.
Hyperinflationary episodes do skew these numbers. One might reasonably assume that hyperinflation is a relic of the distant past, summoning images of Germans pushing around wheelbarrows full of cash in the 1920’s. But of the 57 hyperinflations in the past century, more cases occurred in the uncomfortably recent 1990’s than in any other decade. Plus, we have two countries experiencing hyperinflation now — the much-discussed Venezuela and the record holder, Zimbabwe, with two hyperinflations in a ten year period.
But let’s forget hyperinflation. To reduce the impact of outliers from the dataset, we can look at the median inflation rate instead of the mean. Leaving aside whether 57 hyperinflations across 195 countries truly represent “outliers”, we find a median rate of 5.52%. That certainly sounds a lot lower than 9.5 trillion (roughly 9.5 trillion lower, in fact).
A 5.52% inflation rate means a loss of half of one’s purchasing power every 13 years. And, since the end of the Bretton Woods monetary arrangement in 1971, the median inflation rate has been even higher — 7.12%. At 7.12%, one loses half of one’s purchasing power in 10 years. While this is better than wheelbarrows full of cash, it doesn’t really sound like government issued currencies fulfill the “store of value” function.
So, what does the future hold?
Clearly, we do not and cannot know. But consider the following. Former SEC chairman Chris Cox and former chairman of the House Ways and Means Committee Bill Archer have estimated the unfunded liabilities of Medicare and Social Security. Their estimate is $87 trillion. BU economist Laurence Kotlikoff calculates a “fiscal gap” of $222 trillion. This is just the U.S. There are pension gaps in the UK, Japan, the Netherlands, Canada, Australia, India and China.
What will these governments do? Will they admit to their citizens that they cannot keep their promises? In the U.S. alone that would require a reduction of spending of more than 40%, permanently.
Will they raise taxes massively without affecting economic growth (magically removing the incentive effects of taxation)? In the U.S., the Federal government has never collected more than 20.9% of GDP in tax revenue, no matter how high the tax rates. The government would have to bring in more than 25% of GDP, somehow, all without reducing growth.
Or will governments follow a time-honored tradition? Increase the money supply in some ill-considered and last-minute plan to meet obligations only to see it spiral out of control, ending up with worthless money.
Government issued currencies simply do not have great track record in providing long term stability. They can, in many but not all cases, produce low price volatility and an illusion of stability, until they collapse. And when they collapse, the loss of every economic value they possess is, distressingly often, total. Cryptocurrencies, on the other hand, make no promise of stability. Their only promise is a pre-determined and transparent monetary policy. Because that policy is generally not changed (and it would usually be obvious if it were), they can fluctuate wildly in price as demand increases and decreases. But monetary inflation is usually an issue of runaway supply.
Anyway, Bitcoin is dangerously volatile. Stay away.
