Dilemma: When economic stagnation meets rising prices

In economics, there is a perplexing phenomenon where high unemployment rates, slow production growth, or even recession coincide with continuously rising prices. This situation is referred to as stagflation, a term coined by British politician Ian Macleod in 1965, combining the concepts of “economic stagnation” and “price inflation.”

Why is stagflation so tricky

Economic issues usually follow certain patterns. To combat economic recession, central banks will release liquidity, lower interest rates, and increase the supply of funds in the market. This will encourage businesses to expand and create jobs. Conversely, when prices rise too quickly, policymakers will take tightening measures—raising interest rates, reducing the money supply, making borrowing more expensive, thereby suppressing consumption and investment.

But stagflation breaks this logic. The economy is stagnant while prices are rising; no policy can simultaneously address both issues. Stimulating growth will exacerbate inflation, while suppressing inflation will worsen the recession. It's like a doctor facing a patient who has both a high fever and low body temperature—both symptoms cannot be treated with the same medication.

Historical Review: The 1973 Oil Crisis

The 1970s was the most typical case of stagflation. In 1973, the Organization of Arab Petroleum Exporting Countries imposed an oil embargo on Western countries supporting Israel. The sudden interruption of crude oil supply led to a surge in energy prices.

The central banks of the United States and the United Kingdom have lowered interest rates to stimulate the economy, but this cannot offset the impact of rising energy costs. The result is:

• The operational costs of the enterprise have significantly increased.
• Consumers' spending on energy and food has surged.
• Even if interest rates fall, people do not have extra funds for other consumption.
• Economic stagnation and high inflation occur simultaneously

This historical lesson indicates that certain external shocks (such as supply chain disruptions) may not be solvable through conventional monetary policy.

What causes stagflation

The conflict between monetary policy and fiscal policy

The government influences the economy through adjustments in taxes and spending (fiscal policy), while the central bank affects the economy by managing the money supply (monetary policy). When the two are in opposite directions, it may lead to stagflation.

For example: the government increases taxes, reducing residents' disposable income, while the central bank conducts quantitative easing and lowers interest rates. The government is tightening while the central bank is loosening, resulting in ample liquidity but a lack of economic momentum, ultimately leading to rising prices and stagnation in growth.

risks of the fiat currency system

In the past, most countries pegged their currencies to gold reserves. After World War II, this system was abandoned in favor of fiat currency. While it gave central banks more control, it also brought inflation risks—without the constraints of gold reserves, the printing press can operate indefinitely.

supply-side shock

The sudden rise in production costs—especially energy costs—will immediately lead to a rise in commodity prices. Consumer purchasing power declines, businesses struggle to maintain growth, and unemployment increases. This is a typical supply crisis.

Responses from Different Factions

The perspective of monetarists

They believe that controlling inflation is a top priority. The solution is to tighten the money supply and raise interest rates. While this will suppress prices, it may exacerbate the recession. Monetarists bet that after short-term economic pain, long-term stability will follow.

supply-side economist

They advocate for improving production efficiency rather than merely managing demand. By subsidizing, investing, and reforming policies to lower production costs, supply can be increased. If supply rises, prices will naturally fall, and the economy can recover.

advocate of the free market

Some believe that the best approach is to let the market adjust itself. When prices are too high, consumers will naturally reduce their purchases, and after demand decreases, prices will fall. The unemployment issue can also self-correct through market forces. However, this method may require years or even decades of social pain, as the economist Keynes said: “In the long run, we are all dead.”

Cryptocurrency Market and Stagflation

risk of economic stagnation

When residents' incomes stagnate or decline, they reduce risky investments. Cryptocurrencies are often viewed as high-risk assets and are the first to be sold off during economic downturns. Large investors will also withdraw from highly volatile assets and turn to cash and bonds.

The impact of central bank policies

If the central bank raises interest rates to curb inflation, the crypto market will be under pressure. High interest rates mean:

• Investors can obtain stable returns from banks, no longer needing risky assets.
• The cost of borrowing has risen, making derivative trading expensive.
• Liquidity tightening, trading activity decline

On the contrary, once inflation is under control and the central bank begins to ease, the crypto market may benefit from increased liquidity.

Bitcoin as an inflation hedge

Many investors view Bitcoin as an inflation hedge. The fixed supply (21 million coins) means that BTC cannot be diluted by inflation. Holding Bitcoin during times of high inflation can protect wealth.

But this strategy has limitations:

• The cryptocurrency market is highly correlated with the stock market in the short term, and both may decline simultaneously during periods of inflation.
• During stagflation, market risk aversion makes it difficult to push up BTC prices even with inflation.
• This hedging is most suitable for long-term holders; short-term traders may get stuck.

Practical Insights for Economic Participants

Stagflation has different effects on different groups:

• Wage earners: The risk of unemployment is rising, but if they keep their jobs, the wage rise may not keep up with inflation.
• Saver: Deposit shrinking, traditional financial products may yield negative returns.
• Investors: Stocks and crypto assets are under pressure, cash is king.
• Enterprise: Rising raw material costs, shrinking demand, profit margins are being squeezed.

Conclusion

Stagflation is a paradox in economics and one of the most troubling situations for policymakers. Traditional regulatory measures often contradict each other in this case—solving one problem can exacerbate another. Effectively addressing it requires a deep understanding of various dimensions such as economic structure, supply chain dynamics, monetary flow, and the job market, rather than simply following textbook prescriptions.

In the field of crypto assets, understanding the mechanism of стагфляция helps investors make more informed decisions during different economic cycles. Whether it's inflation or recession, the market will give signals — the key is to learn how to interpret them.