Hyperinflation or deflation? How Cathie Woods refuted Jack Dorsey’s end of the world prediction


Twitter and Square CEO Jack Dorsey recently stoked hyperinflation fears emanating from the United States and then around the world. But Cathie Woods, founder, CEO and CIO of Ark Invest, has taken to Twitter to challenge her claims.

“Hyperinflation will change everything. It’s happening, ”Dorsey tweeted on Oct. 23.

“It will happen soon in the United States, and therefore in the world,” added the billionaire.

The specter of hyperinflation quickly became a scarecrow for critics of the US Federal Reserve, critics of the Biden administration, crypto enthusiasts and several fringe political groups.

The groups fear that the overly accommodative policies adopted by the US Federal Reserve, among other national central banks, through quantitative easing and fiscal stimulus measures have put too much money into the economy, which will quickly lead to inflation once the COVID-19 crisis is over. overcome.

What is hyperinflation?

Simply put, inflation is the rate of increase in the general price level of any economic system. It is calculated by comparing the price of certain goods and commodities like food, energy and fuel each year.

Most central banks prefer to have a relatively stable but positive level of inflation because it is better than the alternative of a recession. But hyperinflation is defined as a rapid, excessive, and uncontrollable general price increase in an economy, typically measuring more than 50% price increase per month. Venezuela is currently in a state of hyperinflation with an inflation rate of 3,012%, while countries like Sudan, Zimbabwe and Lebanon also have very high inflation rates.

According to studies and research, hyperinflation only occurs in very specific circumstances, including in the aftermath of a war, when tax authorities lose control; or as a result of populist monetary policies.

The absence of hyperinflation does not exclude high inflation. Many experts believe the United States could experience 3-4% inflation by 2022, with U.S. Treasury Secretary Janet Yellen saying she believes inflation will return to acceptable levels by 2022 Even such a marginal rate can considerably reduce the purchasing power of consumers. , reduce corporate margins and significantly reduce the value of assets.

Wood’s rebuttal

While most experts agree that inflation, not hyperinflation, is likely to affect the US economy, Wood has a contrarian theory. Wood suggests that the nation will soon experience deflation instead. Deflation is the fall in the price level of goods and services, caused by the reduction in the flow of money and credit, and by increased productivity and technological improvements. Deflation occurs when the inflation rate is less than 0%.

“In 2008-09, when the Fed started quantitative easing, I thought inflation was going to take off. I was wrong. Instead, the velocity – the rate at which money turns per year – has declined , removing its inflationary sting. The velocity always drops, “Wood said in a tweet.

Wood believes technological advances will be responsible for the next episode of deflation.

“Now, we believe that three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy. Two sources are secular, or long term, and one is cyclical. Technological innovation is deflationary and the most powerful source, ”she added in her Twitter thread.

Wood noted that AI training costs have already been reduced by 40-70%, which will be the source of many breakthroughs in reducing costs for businesses. “AI has the potential to transform every industry, industry and business over the next 5-10 years.”

“When costs and prices go down, velocity and disinflation – if not deflation – follow. If consumers and businesses think prices are going to come down in the future, they will wait to buy goods and services, which will lower the velocity of money, ”she added. added.

Wood also said that companies that have met the short-term goal of meeting investor demand through creative accounting, increasing earnings per share and dividends, will face the heat not to invest in. innovation. As these companies struggle to keep pace, they will have to give up assets at reduced rates in order to keep debt at bay.

“The third and most controversial source of deflation is cyclical. Because businesses have closed and have been caught off guard as the consumption of goods has taken off during the coronavirus crisis, they are still scrambling to catch up, probably double and triple orders beyond their needs, ”he said. added Wood.

“As a result, once the holiday season has passed and businesses are faced with oversupply, prices should drop. The prices of some commodities – lumber and iron ore – have already fallen by 50%, with China’s crackdown being one of the reasons. The price of oil is an outlier and psychologically important.

Wood further said that new government mandates and regulations and ESG pressure from investors would see companies quickly divest from fossil fuels in favor of renewable sources.

“On the supply side, ESG (environmental, social and governance) mandates have forced energy companies to shift their investment spending from mature fossil fuels to nascent renewable energies. Meanwhile, banks have deprived fracking companies of funding after their near-death experience in 2020, ”said Wood.

Wood added that the growing adoption of electric vehicles would spell the end of the fossil fuel industry as well. “In response to the near quadrupling of oil prices since the trough of last year, the adoption of electric vehicles has accelerated, sowing the seeds for a serious decline in oil prices in the longer term.”


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