1. Home
  2. News
  3. Stablecoin
  4. Inflation is inevitable: What does that mean for Stablecoins?

Inflation is inevitable: What does that mean for Stablecoins?

Photo of: Joseph Stone
by Joseph Stone

Federal Reserve Chairman Jerome Powell announced on August 27th that the Fed would allow inflation to surpass 2%. In his speech, he argued for the necessity of printing large amounts of money to kickstart the economy. This has scared many economists as wild inflation is very dangerous for the economy and while necessary to get out of the post-Covid depression, many argue it should be intelligently balanced with deflationary measures such as budget cuts, austerity and wealth redistribution.

The Fed will also continue buying Treasury Bonds, essentially buying out the debt accrued by the government, at a rate of $80 billion per month. From March to August, the Federal Reserve’s total assets went up almost 50% from $4.3 trillion to $6.6 trillion, an almost unprecedented increase which can only be truly compared to 1929 or 2008.

Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

As we can see in the chart above, over the course of the last 12 years the Fed’s assets have grown by a factor of 8 to the current $6.6 trillion. This has increased immensely the debt to GDP ratio of the US as a whole and strongly threatens the value of the almighty dollar. The interest rate is currently at zero and very certainly will stay there (if not negative) for the foreseeable future.

Interestingly however, inflation has not risen significantly so far as people and organizations have stayed very conservative with their money in these uncertain times. Many economists agree that this is only temporary however and that inflation will certainly have consequences on the prices of services, commodities and assets in the long run.

Although Powell’s announcement is of little immediate consequence, in the long term it will have profound implications for the price of equities, oil, gold and cryptos, and, more broadly, to the modus operandi of the entire financial system.

Alexander Lipton – for Coindesk

What does this mean for stablecoins?

Right now, the total market capitalization of stablecoins pegged to the US dollar is $15 billion. This is relatively small compared to the overall economy. While right now, staking coins for profit is very profitable, we should enjoy it while it lasts because this is unsustainable.

A more reasonable target would be a 2% return rate which would offset the loss on 2% inflation. In that case, stablecoins will allow users to keep their money safe and without losing any value. Is that appealing enough though ? While stablecoins also have the added utility of facilitating trades, there seems to be other potentially more profitable options for people’s savings.

For stablecoins to truly flourish and make a large impact on the global market, they need to increase their utility or find a way to offer better returns outside of the traditional banking system. This is far from impossible and domains like decentralized finance already offer attractive options for staking, lending and many other options to make stablecoins return a pretty hefty profit.