Search

What is Stagflation?

The concept of stagflation, which was first used in England in 1965 to describe the current economic situation, came to the fore again during the recession after the oil crisis in the 1970s and became a more frequently used word. The concept of stagflation is an economic term formed by the combination of the words "stagnation" and "inflation". While stagnation refers to a recession or contraction in the economy, inflation is the situation where the value of money decreases and prices rise. The simultaneous occurrence of stagnation in the markets and the depreciation of a currency causes stagflation.


There is an increase in unemployment in cases of stagflation, which is seen as a paradoxical situation in economic theory. The reason why stagflation is seen as paradoxical is that, according to economic theories, there is an inverse relationship between unemployment and inflation rate. Unemployment is expected to fall when inflation rises, or to rise when inflation falls. In cases of stagflation, however, this inverse ratio does not occur, and there is a picture where inflation and unemployment go in the right proportion. Inflation and unemployment rise simultaneously.


What are the Causes of Stagflation?


Although it is not easy to reveal the reasons clearly, stagflation situations can be caused by various reasons. There are economists who think that one of the first examples of stagflation was the oil crisis in the 1970s. Accordingly, there are opinions that after the oil crisis, oil prices were increased by oil exporting countries and therefore stagflation was experienced. It is among these views that this increase in oil prices caused a worldwide recession. Recession refers to a situation in which economic growth is negative.


Rising oil prices are expected to cause an increase in the production costs of petroleum-related products. It is thought that the increase in production costs causes a contraction in supply even though the demand does not decrease. Therefore, an increase in inflation can also be seen. While the increase in production costs causes a decrease in production, this decrease can be counted as another factor that causes unemployment to increase. The increase in unemployment may also be one of the factors affecting the slowdown in economic growth.


How Does Stagflation Affect Consumers and Producers?


While stagflation causes an increase in production costs, the increase in production costs may push the producers to cut costs. At the end of this, a state of stagnation can be seen in the labor market. It is seen that the increased costs that cause unemployment to rise are reflected in the prices of the final product going to the consumer, thus causing them to face higher prices in the eyes of the consumer. In stagflation situations, consumers who experience a decrease in their purchasing power with the increase in unemployment and the rise in prices may face inflation and the inflation may increase more rapidly than expected.


Stagflation and Limited Supply of Bitcoin


How a possible stagflation might affect the cryptocurrency world is another topic worth discussing. When it comes to Bitcoin in particular, it may be valuable to talk about some of the basic features of Bitcoin.


Bitcoin is a store of value known for having low inflation. The number of Bitcoins circulating and able to circulate in the markets is limited to 21 million. Having a limited supply and high supply control is one of the features that protect Bitcoin from high inflation.


The Starter Block is the first block of the blockchain to be created, and 50 Bitcoins were generated as a block reward. The Bitcoin block reward is used to identify new Bitcoins that are rewarded to cryptocurrency miners for every block they successfully process on the blockchain network. The halving of new Bitcoin production, which occurs every 10 minutes, in certain periods is defined as the Block Reward Halving. Reward halving repeats every 210,000 blocks and occurs approximately every four years. The initial block reward decreased to 25 BTC on November 28, 2012, to 12.5 BTC on July 9, 2016, and to 6.25 BTC with the halving on May 11, 2020.


The block reward halving was designed by Satoshi Nakamoto to offset inflation, thereby reducing the amount of Bitcoin produced. Thanks to the decentralized nature of the Bitcoin network, the halving takes place independently of individuals and organizations without any negotiations, a country administration or a central authority decision.