Bitcoin will never be too expensive to protect your savings against inflation
In this article, we will explain why Bitcoin will never be too expensive to protect your savings against inflation. But before doing so, we need to understand the fundamentals of what inflation is and how it affects your savings or, more specifically, your buying power. We’ll also analyze how it has evolved over the last 100 years and compare that to the evolution of wages.
What is inflation and how can we measure it?
Inflation is the general increase in the prices of goods and services over time. It reflects the changes in the purchasing power of money, or how much a dollar can buy. Inflation can come from various factors, such as changes in supply and demand, monetary policy, fiscal policy, exchange rates, and expectations.
The most common measure of inflation in the United States is the Consumer Price Index (CPI), which tracks the changes in the prices of a basket of goods and services that represent the average consumption of a typical household. The CPI is calculated by the Bureau of Labor Statistics (BLS) every month and is expressed as a percentage change from a base year. The CPI can be divided into various categories, such as food, housing, transportation, medical care, education, and recreation.
Another measure of inflation is the Personal Consumption Expenditures (PCE) index, which is based on the expenditures of all households and nonprofit institutions serving households. The PCE index is calculated by the Bureau of Economic Analysis (BEA) every quarter and is used by the Federal Reserve as its preferred measure of inflation. The PCE index covers a broader range of goods and services than the CPI and adjusts more frequently for changes in consumer preferences and quality improvements.
What is the average inflation over the last 100 years?
According to the BLS (Bureau of Labor Statistics), the average annual inflation rate in the United States from 1920 to 2020 was 2.9%. However, these averages mask significant variations over time, as the following table shows:
The highest inflation rates occurred in the 1940s and the 1970s, while the lowest inflation rates occurred in the 1930s and the 2010s. The 1930s was a period of deflation, or a general decline in prices, due to the Great Depression and the contraction of the money supply. The 1940s was a period of high inflation, or a rapid increase in prices, due to World War II and the expansion of the money supply. The 1970s was another period of high inflation, due to the oil shocks, the Vietnam War, and loose monetary policy. The 2010s was a period of low inflation, due to the Great Recession, the global financial crisis, and tight monetary policy. It’s likely that the 2020s will also be a period of higher-than-average inflation due to the COVID-19 pandemic relief packages issued by the government.
Can we trust the inflation data from the BLS and the government?
Measuring inflation is not an easy task, and over the years, the BLS has been known to frequently change its calculation methods, for example, by changing what constitutes the CPI basket. So, is the 3% average inflation over the last 100 years correct?
In her book “Why Our Financial System is Failing Us and How We Can Make It Better,” Lyn Alden proposes another way to calculate actual inflation since 1913:
“In 1913, when the Federal Reserve was created, there was $19.31 billion in broad money. At the end of 2022, there was $21.4 trillion ($21,400 billion) in broad money, which is an increase of 1,118 times over, or an average of 6.6% per year when compounded for 109 years. The population of the United States was 97 million in 1913 and about 333 million in 2022.
This means that in 1913, there were 199 dollars per person in the system, and in 2022 there were over 64,800 dollars per person in the system. This is a per-capita broad money supply increase of 325 times over, or 5.5% compounded annually.”
To me personally, 6.6% or 5.5% yearly inflation feels more realistic than the 2% or 3% the BLS would have us believe. But how big of an impact would such a difference have on people’s buying power?
With a 3% average inflation compounded over the years, your buying power comes down by 50% after about 21 years. But with 5.5%, your buying power comes down by 50% after only 12 years—almost twice as fast. Also, keep in mind we are using the USA as an example with one of the strongest fiat currencies in the world, and people’s buying power in countries with double-digit inflation like Argentina or Turkey can see their buying power reduced by the same amount in less than 5 years!
Are wages growing as fast as inflation?
One of the important implications of inflation is its impact on the real income and living standards of people. If the inflation rate is higher than the wage growth rate, then the real income of workers will decline, meaning that they will be able to afford fewer goods and services with their earnings. If the inflation rate is lower than the wage growth rate, then the real income of workers will increase, meaning that they will be able to afford more goods and services with their earnings.
According to the BLS, the average annual wage growth rate in the United States from 1920 to 2020 was 4.3%. However, this average also masks significant variations over time, as the following table shows:
As the table shows, the highest wage growth rates occurred in the 1940s and the 1970s, while the lowest wage growth rates occurred in the 1920s and the 2010s. The 1940s and the 1970s were periods of high inflation, but also of high wage growth, due to strong labor demand, unionization, and the indexation of wages to prices. The 1920s and the 2010s were periods of low inflation, but also of low wage growth, due to weak labor demand, de-unionization, and stagnation of productivity.
If we use the BLS data, the purchasing power of workers should have increased by more than 1% every year for more than 100 years. Why is it then that in 2024 only a small percentage of Americans are able to buy a house? It seems more realistic to have a 5.5% average inflation growth rather than 3%, as that would explain why today so few Americans can afford a home compared to 100 years ago.
Bitcoin will never be too expensive to protect your savings against inflation
Bitcoin can serve as a hedge against inflation by offering a decentralized and finite digital asset that is not subject to the same inflationary pressures as fiat currencies. Unlike traditional money, which can be printed in unlimited quantities by central banks, Bitcoin has a supply cap of 21 million coins, making it resistant to inflationary devaluation. This characteristic helps protect the capital of individuals regardless of their savings amount.
Importantly, it is not necessary to buy a whole Bitcoin, as the cryptocurrency is divisible into smaller units called satoshis or Sats (1 Bitcoin = 100,000,000 satoshis). This allows individuals to invest any amount they can afford (as low as one USD), thereby preserving their purchasing power against inflation without the need for substantial upfront capital.
Put differently, because of its fixed supply, the value of Bitcoin against fiat currencies that have unlimited supply (like the USD) is likely to continue to increase. The key here is that the pace at which the value of Bitcoin increases against the USD is higher than the average BLS inflation rate of 3% or even the more realistic rate of 5.5%. The current CAGR (Compound Annual Growth Rate) of Bitcoin is above 100% (Source). Although it will reduce over the years as adoption grows, it should remain well above 5.5% for many years.
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