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Bitcoin And The Changing Definition Of CPI

The constant adjustments to the measuring stick of inflation mislead and confuse those looking for a sound store of value.

Below is the definition of the Consumer Price Index (CPI) by the U.S. Bureau of Labor Statistics:

“The CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included.” – U.S. Bureau of Labor Statistics

However, the definition was different 20 years ago. Shadowstats goes into more depth here. Current CPI is simply based on a basket of goods, as defined by the BLS; it does not directly reflect inflation because there are many other assets that hold the money supply. So, the basket of goods on which the CPI is based seems to be a bit arbitrary. To explore this, we will examine the old ways in which CPI was calculated before 1980.

Shadowstats 1980-Based Inflation

In 2011, CNBC published an article on the Shadowstats website and how its inflation calculation is much different than that of the current CPI post-Great Recession. According to Shadowstats, inflation is much closer to 10% based on the methods by which the Bureau of Labor Statistics used to calculate it back in 1980.

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This is much higher than the 1%–2% goal of the U.S. Federal Reserve (Fed), and it begs the question of whether the dollar, although it has been the strongest currency for the past century or more, may not be as strong as the Fed leads us to believe.

Asset Inflation And The Democratization Of Technology

The CPI doesn’t include housing or other assets we use to store our wealth. This is important because goods are not the only place people put their money. Instead, many people use stocks, real estate, gold, and other financial instruments as forms of savings, sometimes because they have no choice and are forced into higher-growth assets.

The official inflation figure based on CPI was 1.6% in 2000, but the average US housing price increased by 12.8%, and stocks, as measured by the S&P 500, increased by 16.3%. Some of these assets have risen in price despite the economy being ravaged by shutdowns and economic restrictions. In response to this, The US government decided to mint checks and send them to people in need, but the majority of Americans received checks despite still being employed. This excess money flooded into bitcoin, stocks, and real estate.

When people take their freshly minted dollars and throw them into stocks to maintain their wealth, the stocks’ valuations do not grow because the stocks are good. It simply expands the overall market by the amount of new dollars. This is known as asset inflation. If assets grew in value with no change in the money supply, that would be a different story. But that is not the case.

The figure below shows how the prices of US consumer goods have changed over the years. The dispersion of prices can be related to a number of different factors, but we can simplify one of them by better understanding democratization. The Cantillon Effect explains how monetary inflation affects certain baskets of items.

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The reason why many items (i.e., those that are below the inflation line) have become more affordable is because technology is inherently deflationary. This is otherwise known as democratization of technology. The definition states that production of a technology gets cheaper as more of it is produced. For example, even though manufacturers are getting better at making televisions and cellphones, the money supply is still inflating. Therefore, the inflation of the money supply is offset dramatically by the deflationary nature of production and technological innovation. This may even be one of the fundamental truths of capitalism: competition drives innovation, and the prices of goods fall over time.

Monetary Inflation And The Money Supply

With Shadowstats focusing on the 1980s definition of CPI, and asset inflation seeming pervasive, there must be another direct way to calculate inflation.

*M2 has entered the chat*

According to, M2 measures the amount of currency in circulation, and the measure has historically grown in times of war and during recessions. In 2020–2021, M2 grew by more than 27%, and it was recently discontinued as an official statistic. This metric seems to come the closest out of anything we have to measuring monetary inflation, yet it was discontinued at the point at which it showed the most weakness.

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If M2 measures the amount of currency in circulation, then the amount of money in existence saw a 25% expansion in 2020–2021. Wherever this inflation shows up, your energy is being leached from your dollar amount and pushed into other places. The dollar isn’t a good store of value; most investors could have told you that. Famously, Ray Dalio said that “Cash is trash” shortly before the pandemic started. So, if this is the case, where can you store your hard-earned money, where it’s safe from inflation?

Energy-Output Preservation With Bitcoin

The Fed bases its policies on how close the economy is to 2% inflation based on the CPI. In the Fed’s eyes, inflation is under control, even though old metrics show extreme levels of inflation, along with the monetary inflation of close to 25%. According to Michael Saylor, monetary inflation for the next five years will likely be 15%–20% year over year in reaction to the pandemic.

So when the entire Fed and government use a monetary measuring instrument that leaves out large portions of the economy, you might ask a few questions to find out why this may be the case. Money is the output of energy saved into a transferable instrument, and people are looking for the instrument that best holds their value.

Bitcoin has a strict monetary policy with an exponential drop in inflation. Every 4 years, the amount of bitcoin mined gets cut in half, resulting in a hardening effect.

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You can never print more bitcoin unless you mine it, and there will never be more than 21 million. Even gold has an inflation rate of close to 2%. But the key difference between dollars, gold, and bitcoin is that the supply of bitcoin can be easily and automatically audited. Historically, the Fed has refused to be audited. Bitcoin is not only extremely verifiable, with a transparent blockchain, but it is audited every 10 minutes with each block. Everyone has the same copy of the network, and it is being audited every hour of every day, 365 days/year, forever.

Bitcoin is the most scarce, verifiable, and sovereign technology ever created. It continues to manifest itself in different ways, but throughout the 2020–2021 pandemic, it has become a monetary anchor at a time when monetary expansion seems to be infinite. Bitcoin adoption will continue to grow, and the demand continues to expand at an exponential rate, as suggested by Metcalfe’s Law. Being the most scarce asset in the world, bitcoin is a way in which you can preserve your energy output without fear of exploitation or excessive supply expansion.

This is a guest post by Mitch Klee. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Bitcoin As A Pressure Release Valve

As currencies inflate in value, Bitcoin serves as a pressure relief valve, allowing capital to escape.

As small-cap currencies inflate, Bitcoin gains adoption.

Bitcoin is the first fully sovereign digital currency. This means that anyone in the world with an internet connection and a computer can download the protocol and start running it. Maybe they want to invest in the technology, maybe they want to store their wealth, or maybe they are using it as a form of payment. Whatever the reason, Bitcoin doesn’t discriminate on the basis of race, creed, or nationality.

This is especially attractive for people in countries with a history of inflation or even hyperinflation. What is hyperinflation? It is when a country’s government or central bank, by printing more and more money to supplement their needs, increases the supply of the currency at a rapid and excessive pace. When the supply of money increases more rapidly than the demand, the price of goods nominally rises. A good example of this has occurred during the last year: food prices have risen dramatically, in part due to the monetary expansion of the world’s currency supplies.

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Price increases of bitcoin in fiat terms can also be seen when the supply of fiat currency expands. Extreme increases in national currency supplies cause the prices of everyday goods to rise. Two recent examples of this are Venezuela and Zimbabwe: prices have risen so dramatically that Zimbabwe is now printing 100 trillion dollar bills and even using paper bills in more utilitarian ways, such as using them as fire starters.

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Many times, countries shut down access and use of the US dollar. Because people change over to a more reliable currency, demand drops and so does the value for the currency being left behind. In turn, closing off the escape route to other currencies cripples the people’s ability to save and destroys the economy. People aren’t allowed to buy USD,so they are forced into using it on the black market

When countries’ currencies hyperinflate, countries have blamed the US dollar. In 2010, Hugo Chavez signed a currency law, pegging the Bolivar to a certain exchange rate. Since then, inflation has only risen, and citizens have been forced into using dollars on the Black Market.

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In November, 2020, Zimbabwe’s Secretary for Finance, told business leaders Zimbabwe wouldn’t return to the USD, saying “One of the biggest mistakes was dollarizing and removing your own currency,” according to a Bloomberg report.

Bitcoin solves this. With the use of bitcoin, people have an option to escape their collapsing, hyperinflated currencies and hold their wealth in a decentralized network that is independent of the current financial system. You cannot stop someone from buying bitcoin, you cannot stop them from transacting in bitcoin, and you cannot stop them from holding bitcoin. There are ways in which a government could constrict the use of bitcoin, but in the past, this has increased adoption. And to stop Bitcoin all together, you would need to shut down the Internet. We all know that doing that, would mean there would be no GDP. When a currency collapses, and people adopt Bitcoin, the incredible value of its use case is revealed in both theory and practice. This increases adoption and could help propel people to create more Bitcoin infrastructure.

The more countries that have hyperinflated currencies, the more capital gets eaten up. Because Bitcoin was created to be the scarcest asset in the world, it is the best instrument to which people can turn. The people who see its value the most are the ones closest to the problem. The first likely event is that impoverished countries adopt Bitcoin as a store of value that is less volatile than their own currencies. Although USD is great for this, Bitcoin allows for better digital transacting. As Bitcoin’s market cap grows, it becomes a more stable form of money. Then, eventually, we could see a cascading effect as an exponential amount of adoption occurs. In Argentina, the inflation rate has increased by 40% in 1 month (January–February 2021). They have a history of inflation, and Paxful, a trading exchange, has been onboarding people there in a rapid manner.

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This is known as leapfrogging. When a new technology is introduced to a poorly developed country, they leapfrog the entire costly infrastructure of the previous system and adopt the new, less costly one. A good example of this is the introduction of cell phones in less developed countries. Building the infrastructure and wiring for traditional telephones would have cost large amounts of money that these countries simply didn’t have. Then, cell phones came around, and building their communication towers carried only a fraction of the cost. This is very similar to the situation with banking infrastructure. So, the first dominoes of adoption to fall could be the smaller, less developed countries.

Historically, the US dollar has been extremely stable, so seeing this specific use case in the US is difficult. However, in a country whose currency loses 40% of its value year over year, Bitcoin would seem stable. As countries with less stable currencies start to adopt Bitcoin and add to its market cap, the network will slowly become less volatile until price fluctuations are reduced to stable levels. This is already visible on the network today.

This all seems very far away, but adoption generally occurs slowly, then all at once. This is the nature of network effects and exponential growth. Ultimately, Bitcoin can be a tool for liberty and freedom from currency abuse, empowering the world and its people. The more efficiently people can store their time and energy as money, the more efficient the world economy will be. 

Source: Bitcoin magazine