Tesla CEO and billionaire Elon Musk has a chilling warning for the US economy. Musk thinks the economy is headed for deflation in light of the Fed’s hawkish stance against inflation. Elon Musk’s warning, if true, will not be good news for the crypto market
He thinks another major interest rate hike from the Fed is likely to cause deflation. The Federal Reserve will announce the next interest rate hike decision on September 21 at the FOMC meeting.
The Federal Open Market Committee or FOMC is the Fed’s monetary policy governing body. It is responsible for controlling the money supply of the US economy.
How Deflation Affects the Stock Market
Deflation is an economic phenomenon where the price of goods and services decreases compared to before. Large economies like the United States analyze price change in the economy by comparing the prices of a “basket of goods and services” over a period of time. The Consumer Price Index, released by the US Bureau of Labor Statistics, is an important index to measure this.
Deflation occurs when supply exceeds demand. This can happen due to high productivity, lower demand, or shrinking money supply in the economy. In the short term, deflation is good news for consumers as commodity prices fall. Moreover, the purchasing power of money also increases.
However, over a long period the economy can contract due to deflation. Economists believe that deflation can be more dangerous than inflation. The Fed can easily control inflation through quantitative tightening. However, curbing deflation through quantitative easing is not easy.
The increased value of the dollar creates a liquidity trap. Investors are hesitant to invest in stocks and other risky assets because cash is the best investment during such a period.
How Elon Musk’s Warning Will Affect Crypto
The crypto market is highly correlated to the general market, especially to technology stocks. It is also a much riskier asset. If Elon Musk’s deflation warning holds, the crypto market may experience a major liquidity crunch.
The content presented may include the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or publication assumes no responsibility for your personal financial loss.