In last week's article, we talked about how inflation removes purchasing power from the money we keep from year to year. This mechanism was created to encourage people to spend their money, to make the money movement put the economy to work and the state to collect taxes. However, inflation leads to a decrease in the value of currencies and, in the long run, has caused the disappearance of some currencies.
Inflation cycles create more visible pressure on currencies that are seen as weak globally. Examples of this are the Venezuelan bolivar or Argentine peso, which continues to lose value against the dollar that is used as an international reference. In South America, the next example of this sharp drop in value may even be the Brazilian Real. The crisis driven by the Coronavirus can accelerate a devastating process for the value of the Real that was already happening:
- Oil - a commodity of which Brazil has many reserves - begins to lose its value in 2008;
- The currency issued by the Brazilian state, which controlled these reserves, begins to depreciate against other fiat currencies;
- The price of consumer goods increases to compensate for the currency devaluation;
- The state prints more currency to try to control the level of purchasing power;
- This further devalues the currency and the money that the citizens have ends up devaluing more;
- Producers raise prices to keep their businesses profitable;
- The cycle is repeated until the currency value is extinguished.
In the graph above, the relationship between the value of oil and the Real is very noticeable. When oil started to devalue in 2008 it dragged the Brazilian currency into a negative spiral that accelerated its devaluation against other stronger currencies.
2020 has been a bad year for everyone. For Brazilians it has been worse. The Real had the worst performance of all currencies against the US dollar. The Real has lost almost 30% of its value against the US currency since the beginning of the year.
If in countries with strong currencies such as the US dollar or the euro, we still do not feel major influences, currencies such as the Brazilian real have already been greatly affected by this devaluation that has increased dramatically in recent months. Proof of this is the news that reports the increase in the price of essential goods such as rice and beans. This is a sign that the process is underway.
Countries like Venezuela, Argentina or Lebanon, have already felt the consequences of destroying the value of their currency. Their economies were devastated and the difficulties for the population increased and today they mean that many are hungry. The governments of these countries are taking steps to try to curb the devaluation of the currency they control and prevent other sources of wealth from leaving the country. For example, in Argentina and Lebanon, governments have declared that bank accounts that are denominated in US dollars be converted into the local currency. This accentuates the difficulties of those who have seen their families emigrate and send them a part of their income. Families see their money turned into a currency that continues to lose value and their ability to buy food or pay rent decreases. Governments, in a desperate attempt to maintain the value of their currency against international currencies, accumulate value in other goods and currencies by robbing the population of the tools they have to fight poverty. This succession of events creates a cycle that reinforces the fall of the local economy and increases currency inflation. Discontent among the population increases and demonstrations like the ones we witnessed this year in Lebanon are beginning to emerge, in which fires were set at bank branches and culminated in a fire at the central bank. People clearly expressed who they thought were the cause of their suffering.
Brazil will be next!
The Real is in a phase of accelerated devaluation and the pandemic has accentuated the difficulties of the current system. The weakest coins will be the ones that will fall the most, and as a result, people who use these coins will suffer even more. And those who have no assets will be the most affected.
As everything in the markets works in relation to supply and demand, scarce goods are valued against currencies that increase supply indefinitely. Therefore, scarcity is an essential characteristic for something to be considered valuable. During the pandemic, we saw the fortunes of several millionaires grow while many of the workers in their companies were unemployed. This happened because these fortunes are associated with goods that, being scarce, were valued with the impression of more money. However, there is a scarce alternative that anyone can buy and control. Bitcoin!
The scarcity of Bitcoin can be verified in the code and there is nothing that a centralized entity can do to increase the amount of bitcoins that will exist. That amount will never be greater than 21 million. The euro and the dollar are also being devalued and even if they do not feel immediate effects, this fall in value can lead to the same terrible consequences that we have seen in other countries. This is yet another reason why Bitcoin is the best place to protect the value you gain from your work effort.
As these currencies lose value, Bitcoin continues to grow. Buy Bitcoin!