Let us find out how China’s deflation affects bitcoin prices and the relationship between the two
For the first time in more than two years, China’s economy has entered a deflationary phase, which might have detrimental effects on Bitcoin (BTC) and other markets in the short- to medium term. This is the analyst Marcel Pechman’s position, and he made it known on the most recent Macro Markets program. He said that the deflation in China, which experts view as a threat, will harm equities, commodities, and Bitcoin, all of which depend on expanding the world economy. “Holding stocks that just happen to depend on global economic growth or use too much financial leverage will not be fun,” he said. The official consumer price index shows that in July, over the prior year, consumer prices in China decreased by 0.3%. This points to a potentially troubling new development in China’s faltering economy.
China’s economy is beginning to deflate for the first time in more than two years, which might have detrimental immediate effects on Bitcoin (BTC). According to the official consumer price index, consumer prices in China decreased by 0.3% in July from the previous year. The highest level since January was reached in July by core inflation, which includes volatile food and energy costs, which increased from 0.4% in June to 0.8%. The statistics release presents a somber image of China’s economy, which is losing momentum due to several problems, including dropping exports, record-high young unemployment, and a sluggish property market. China is also dealing with declining pricing across various industries, including basic consumer products like vegetables and appliances and raw materials like steel and coal. Contrary to the global trend, several nations currently need help with growing prices due to the relaxation of the Covid-19 limits. The possible entrenchment of the assumption of decreasing prices raises concerns since it might reduce demand, increase debt problems, and lock the economy in a vicious cycle from which Chinese officials are unlikely to be able to break.
Deflation is a situation where the general level of prices in an economy falls over time. Deflation poses a particular risk for countries with high levels of debt, such as China, as it increases the cost of servicing that debt and may discourage borrowing, spending, and investment. Eswar Prasad, a Cornell University economist who once headed the International Monetary Fund’s China division, told The Wall Street Journal this. He said: “The reality looks increasingly grim.”
The Fed’s Balance Sheet’s Effects:
The speaker, Pechman, analyzed how the balance sheet of the United States Federal Reserve had grown by $5 trillion from December 2019 to April 2022. He noted that this period of expansion coincided with a 38% drop in the S&P 500 index. He also observed that the Federal Reserve’s balance sheet reached over US$8.9 trillion when the stock market index peaked at 4,800. Pechman argued that the problem stemmed from the large deficit of the US Treasury Department, which spent more than it collected from revenues and taxes.
As a result, the government has to renew some of the debt instead of letting it mature. This implies that the Federal Reserve may need help to keep shrinking its balance sheet, which has been crucial in reducing inflation. Pechman claimed that inflation will be greatly affected when the Federal Reserve is forced to increase its balance sheet again. He recommended that people who own valuable assets such as Apple shares, land, gold, and Bitcoin hold on tight and not be influenced by the temporary period of low inflation.
