Bitcoin (BTC) may suffer short-term consequences as a result of China’s economy entering deflation for the first time in more than two years.
Analyst Marcel Pechman said in the most recent episode of Macro Markets that deflation in China, which experts perceive to be a problem, will have negative short- to mid-term effects on Bitcoin, commodities, and stocks that depend on global economic development.
Holding equities that rely on global economic growth or use excessive financial leverage would be unpleasant, according to Pechman.
And it’s probably not a good time to invest in commodities. As a result, anticipate Bitcoin to suffer in the short to medium term if China’s economy slows.
For the first time in two years, China encountered deflationary conditions last month, signalling a potentially worrying new phase in its faltering economy.
Chinese consumer prices fell 0.3% in July compared to the previous year, according to the official consumer price index.
In fact, core inflation increased from 0.4% in June to 0.8% in July, the highest level since January, by eliminating the volatile prices of food and energy.
The statistics release depicts a bleak image for China as the country’s economic recovery falters as a result of a number of problems, such as decreased exports, record-high youth unemployment, and a sluggish property market.
Additionally, China is dealing with declining prices in a variety of industries, including those for basic consumer products like vegetables and appliances as well as for raw materials like steel and coal.
Contrarily, the global trend shows that many nations are struggling with inflation as a result of loosened Covid-19 limits.
The potential for the assumption of decreasing prices to become entrenched is what gives Chinese policymakers cause for concern. This could reduce demand, increase debt problems, and trap the economy in a vicious cycle from which it will be challenging to break using conventional stimulus measures.
For nations with significant levels of debt, like China, deflation poses a special problem since it raises the cost of servicing that debt and may deter borrowing, spending, and investment.
Eswar Prasad, a Cornell University economist who formerly oversaw the IMF’s China section, told that the situation is becoming worse.
The government’s strategy of downplaying the dangers of deflation and stagnant growth could backfire and make it even more difficult to stop the economy from spiralling out of control.
The Fed’s Balance Sheet’s Effects
Pechman also covered the implications of the US Federal Reserve’s balance sheet, including how it grew by $5 trillion in assets between December 2019 and April 2022.
He emphasized how the S&P 500 index fell by 38% during this expansionary time.
At the same time that the stock market index hit its peak of 4,800, the Federal Reserve’s balance sheet passed $8.9 trillion.
Pechman claims that the problem is caused by the US Treasury Department’s significant deficit, which results from the fact that the country spends more than it brings in through taxes and other revenue sources.
Therefore, rather than allowing some of the debt mature, the government must refinance it.
This implies that the Federal Reserve may not be able to keep shrinking its balance sheet, which has been a key factor in bringing down inflation.
Pechman concluded his argument by saying that inflation will be considerably affected once the Federal Reserve is forced to increase its balance sheet once more.
He urged owners of prized possessions like Apple stock, real estate, gold, and bitcoin to hold on tight and resist being enticed by a temporary era of low inflation.
