Inflation, depression, hyperinflation, and stablecoins. How to hedge against value erosion with stablecoins?

As many major worldwide economies are on the edge of hyperinflation, investors are looking for more ways to secure their savings from looming devaluation. Just when the global economy started recovering from the effects of the global lockdown and geopolitical tensions, inflation again reared its head and forced central banks to raise interest rates and print out more paper money. This, in turn, has only worsened the global economic situation by skyrocketing the prices of essential commodities like energy and food.

Despite every effort, the UK has hit 10.1% inflation while British citizens watch their purchasing power drop by the day. The global inflation rate has accelerated faster than forecasted, adding extra stress on savings and affecting consumer spending.

Apart from the threat of economic decline, all these inflationary issues negatively impact the value of fiat money. This is why consumers are in need of specific assets or financial tools to protect their savings. As a result, consumers are searching for alternatives to fiat money, and this is where stablecoins enter the game.

But before we discuss how stablecoins and the sEURO can protect your income against inflation, we need to learn what inflation, hyperinflation, and recessions are.

Inflation, hyperinflation, or recession? How to describe the state of today’s global economy?

Anyone hoping the global economy would finally return to normal in 2022 has seen their expectations dashed. All these events propelled by the war in eastern Europe have resulted in a decrease in the purchasing power of almost every currency.

So what is inflation? It’s a rise in prices that can be interpreted as the decline of purchasing power. As a rule, the inflation rate is reflected in the average price rise of a basket of goods (to be more precise, the consumer price index). This means that if a basket’s price increases by 10% in a year, consumer inflation is believed to be running at a 10% annual rate. Inflation can be both positive and negative.

Tangible assets like stocked commodities or property cannot resist inflation. With a rise in prices, one unit of money can buy fewer goods. Let’s take, for example, the price of a cup of coffee. In 1970, it cost just $0.25 a cup. But in 2022, that same cup costs a minimum of $1.85.

Taking the political aspect out of inflation, one more factor that causes inflation is printing more money and legal devaluation. When the situation gets worse, the next step is hyperinflation.

Hyperinflation describes a series of out-of-control and excessive price increases. A vast majority of experts don’t believe hyperinflation is likely to happen, especially in developed countries. Hyperinflation can be best illustrated by the events that took place after World War I, when the German government printed so much money that it resulted in an inflation rate of 322% per month.

Taking into account all the supply chain disruptions, the war in Ukraine, inflation, and higher interest rates — we are on the edge of a deep recession or great depression. A recession is a downtrend in the economy measured by negative gross domestic product growth.

While a recession can be uncomfortable for our finances and savings, they are a normal part of the economic cycle. The US has already experienced 14 recessions in the last 100 years, and a vast majority of consumers haven’t even noticed. The Great Depression was propelled by the stock market crash in 1929. It was the longest economic depression of the 20th century.

Despite all warning signs, many economists say the economy is too healthy to fall into another Great Depression. Something we can all observe from those events is the fact that fiat currencies are designed to lose value over time.

So if consumers want to secure their money’s value and hedge against inflation while maintaining liquidity, borrowing against their own assets using DeFi protocols is a great way to do just that.

Could stablecoins negate the effects of inflation?

Stablecoins may be the answer to retaining the value of money while maintaining the ability to make transactions. Stablecoins are pegged to other real fiat currencies or assets like gold. Unlike BTC or ETH, which are good for long-term investments, stablecoins can be used as a credible medium of exchange. When used for minting within DeFi protocols like TheStandard.io, stablecoins can help negate inflation's negative effects as the debt balance is also devalued by inflation. However, by their nature, stablecoins are prone to inflation like fiat money.

Reasons to use stablecoins as a hedge against inflation:

• Lower transaction costs for international trade and faster processing speed when compared to the traditional banking system;
• If you are the one to mint them as a debt to yourself, then inflation pays off your debt;
• Ease of access. Stablecoins can be bought and sold through an app;
• Resistant to ill effects of inflation, especially in developing countries;
• Bigger yields. By putting stablecoins into yield farming — you can offset inflation.

In other words, stablecoins are safer from inflation compared to developing countries currencies. For example, the Turkish Lira is expected to lose 81% of its value while the Euro and USD are still able to withstand such severe waves of inflation. For that type of hedge, people have to watch the foreign exchange markets and trade them.

The best way for people to use inflation in their favor is to mint or borrow stablecoins within DeFi protocols at fixed interest or, even better, at zero interest (this is what thestandard.io aims to have); stablecoins can then deliver returns through DeFi lending while inflation devaluates the debt you took out to mint them in the first place.

For example, Standard Euro is a stablecoin backed by digital and physical assets and governed by an open and decentralized community (DAO). Since it is pegged to the fiat Euro, its value is stable to the euro. Users create new sEURO by borrowing them at zero interest. Then can go and buy a house with no interest and let inflation pay it off. DeFi is amazing!

How can I use TheStandard.io’s Smart Vaults to leverage inflation?

TheStandard.io allows anyone to take out a fixed 0% interest loan in sEURO. So anyone can put ETH, Bitcoin, or tokenized gold into a smart vault, borrow money for a car or a house at 0% interest, and then as inflation devalues the loan — they’ll effectively have less to pay back. It’s a smart contract that governs the loan, so no government or bank can adjust the debt to match inflation.

Before TheStandard’s protocol, only the wealthy could profit from inflation. Since they could get a loan at a fixed interest rate that can not be renegotiated if the currency collapses or inflates. They could then invest the borrowed money into real estate, land, gold, or other assets. A few years later, the price of a house could match the price of a gallon of milk. Taking into account that their loan cannot be renegotiated, they could buy a mansion for the price of a carton of milk.

With the sEURO, anyone can get a 0% interest loan and leverage inflation. Stablecoins offer peace of mind and serve as a hedge against inflation or an upcoming recession while minted as debt through DeFi Protocols like TheStandard.io. Locking up your funds with the sEURO will help you retain the value of your savings and even benefit from an excellent return.