Markets
Nobel Economists Warn Trump’s Re-Election Could Rekindle Inflation, Impacting Cryptocurrency Markets
Photo by Darren Halstead on Unsplash.
Key points
- Sixteen Nobel Prize-winning economists express concern about Trump’s possible re-election and the economic risks this entails.
- Economists cite rising inflation and instability as the main threats to Trump’s economic policies.
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Sixteen Nobel Prize-winning economists have warned that Donald Trump’s potential re-election could damage the US economy and reignite inflation, a development with significant implications for the cryptocurrency market as a whole.
The economists letterreleased Tuesday, argue that Trump’s policies would lead to economic instability and higher consumer prices. They say his “fiscally irresponsible budgets” could revive high inflation, contrasting that with praise for President Biden’s economic record, including investments in infrastructure and clean energy.
This warning comes as Trump, now a convicted criminalis centered on a pro-cryptocurrency stance in his campaign. He has vowed to end what he calls the government hostility towards cryptocurrencies and has begun accepting cryptocurrency donations. This represents a marked shift from his previous critical views on cryptocurrencies and digital assets more broadly.
“We believe a second Trump term would have a negative impact on the US economic position in the world and a destabilizing effect on the domestic US economy,” the economists said.
Leaders in the cryptocurrency industry like Cathie Wood support Trump’s presidential candidacy, believing that a victory for Trump is “the best for our economy.” Even founders like the Winklevoss brothers support Trump, despite their donation to the campaign get a refund.
Data on cryptocurrencies and inflation
The potential for renewed inflation under a Trump presidency could have mixed effects on the cryptocurrency market. While some see Bitcoin as a hedge against inflation, data shows a negative correlation between its price and rising consumer prices. However, cryptocurrencies often see gains when the money supply (M2) increases, which could occur in the event of expansionary fiscal policies.
Recent cryptocurrency market rallies have already raised concerns about potential inflationary impacts. The “wealth effect” from unrealized gains in cryptocurrencies could increase consumer spending, potentially injecting demand-pull inflation into the economy. That could force the Federal Reserve to reconsider expected interest rate cuts.
The following chart, extracted by Perplexity based on data from CoinMarketCap, shows that there is a complex relationship between economic factors and cryptocurrency performance.
The chart shows that cryptocurrency prices, particularly for Bitcoin, Ethereum, and Solana, have shown greater volatility than traditional CPI measures over the past year. This volatility could be exacerbated by the economic instability that Nobel economists have warned about in the event of Trump’s re-election.
The chart shows that while cryptocurrencies have seen significant price appreciation, they remain susceptible to sharp corrections. Such corrections often coincide with periods of economic uncertainty, which could become more frequent under policies described as “fiscally irresponsible” by Nobel economists. The unpredictable nature of Trump’s decision-making style, as highlighted in the warning, could lead to increased market volatility, potentially discouraging institutional investors and slowing the widespread adoption of cryptocurrencies.
The data also shows that energy prices have a significant impact on overall CPI. Trump’s energy policies, which could differ significantly from current approaches, could lead to fluctuations in energy costs. This, in turn, could impact mining profitability and network security for proof-of-work networks like Bitcoin, potentially destabilizing the broader crypto ecosystem.
Economists’ concerns about international relations under the Trump presidency could also have a negative impact on the global nature of cryptocurrency markets. Strained diplomatic ties could hamper cross-border transactions and collaborative efforts in developing global cryptocurrency regulations, potentially fragmenting the market and reducing liquidity.
For the cryptocurrency industry, economists’ warning highlights the complex interplay between macroeconomic policies, inflation and digital asset markets. While Trump’s pro-crypto stance may seem favorable, the broader economic instability predicted by these economists could create a challenging environment for cryptocurrencies.
The contrasting economic visions presented by Trump and Biden, and their potential impact on inflation and monetary policy, are likely to be key factors influencing the trajectory of the cryptocurrency market in the run-up to and after the 2024 US presidential election.
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