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Lately, there has been a lot of talk and discussion about inflation as many are afraid that hyperinflation could possibly become a problem in society, especially for a currency like the dollar where public consumption and the Federal Reserve that buys bonds to keep the market up have increased.

Lately, there has been a lot of talk and discussion about inflation as many are afraid that hyperinflation could possibly become a problem in society, especially for a currency like the dollar where public consumption and the Federal Reserve that buys bonds to keep the market up have increased during pandemic.

While hyperinflation is a big problem, the opposite can also be an even bigger problem depending on the type of perspective you have on the economy, deflation.

Economist Cathie Woods, also CIO at Ark Investment, believes in deflation

If you do not know Cathie Woods, she got a lot of attention during the pandemic when her flagship fund “Ark Innovation” really went up during the Corona pandemic given its exposure to technology and the IT sector. Many of her holdings are companies such as Zillow, Palantir and other technology companies with high growth potential.

If we ignore the fact that her fund has grown so much during the pandemic, how come she has become such a controversial woman? Well, the main reason is that she does not think we will end up in a hyperinflationary situation even if consumer prices have grown around 8% since the start of the Corona pandemic, which is a marginally high increase compared to a stabilized economy. This has led many to question her ability to understand macroeconomics, including legendary investor Michael Burry who predicted the 2008 financial crisis. To sum up their feud, Michael Burry believes that the inflation situation will get worse and that consumer prices will continue to grow far too fast, while Cathie Woods believes that current inflation is only a problem with demand and that the technology sector will create deflation in the long run. to make several sectors more efficient with money. So which of these is really right?


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The inflation and deflationary scenario is complicated

Many do not understand how these are related, many relate the concept of inflation to the fact that money reduces its value over time and that more currencies are put into circulation. While the statement is true, it is a very comprehensive way of describing inflation that does not provide any actual information about what is going on. What many do not understand with inflation is that there is actually a problem with supply and demand, often high inflation occurs in connection with the demand for certain goods and services rising very much in a short time such as housing prices in Sweden. Many believe that rising prices are normal signs of a healthy economy, but the problem is when demand declines and people do not seek the same goods and services. Then we are suddenly in a situation where the prices of goods are far too high and the purchasing power of the currency has decreased in connection with this. Inflation is a very complicated subject, if you want to learn more about it you can read our article.

The opposite scenario would then be deflation, instead of rising prices we then see falling prices. This obviously sounds very nice as your personal purchasing power increases without your actual real income increasing, this is very beneficial for you who have some form of monthly income. However, from a macro perspective, this is still a “zero sum” effect. The reason for this is very simple, deflation is not something that is created but it is a reduction in demand in society. A good example of this is Japan, which has been in a stage of deflation for a very long time, much of this is due to the country’s population not growing as much, but the main factor driving Japan’s long deflation is technology. Japan has long been a country that has been far ahead in technology, also because the country suffered the most damage during the IT bubble.

The connection is very simple here, because technology streamlines a society and certain tasks reduce the demand for labor, which today is a major cost item for companies. When the demand for labor decreases, so does the demand for the currency in the same direction as there are no workers to pay. We also see that highly industrialized countries such as China, U.S and France are following the same trend. The more technological a society becomes and the better the health care becomes, the lower the population growth. More countries will begin to experience things like an aging population, more technology and a smaller workforce, which are driving factors for deflation.

How to make money during these times?

Like most macroeconomics, inflation and deflation are two very complex topics; one could write a long research report in the fields without actually accomplishing anything given that there are so many things affecting inflation and deflation it is impossible to understand them. However, there are always ways to protect yourself from unclear market conditions. We have an article that describes different types of commodities and various methods you can use to protect yourself against inflation, my personal favorite is cryptocurrencies when it comes to diversifying towards the market. Among other things, due to the different possibilities you can take advantage of, but also the fact that cryptocurrencies are not as complex as fiat currencies, it creates a simpler technical analysis of the market situation. If you want to learn more about economic indicators to help you understand the market better take a look at our article on it.

Which site is best for trading with different instruments?

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