Tesla CEO and billionaire, Elon Musk, has a chilling warning for the U.S. economy. He believes the economy is heading towards deflation.
Elon Musk’s warning, if true, will not be good news for the crypto market.
He believes another major interest rate hike from the Fed will risk deflation. The Federal Reserve will announce the next interest rate hike decision on the 21st of September at the FOMC meeting.
The Federal Open Market Committee or FOMC is the monetary policy-making body of the Fed. 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 from before. Major economies like the US analyze the 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 just that.
Deflation occurs when the supply outpaces the demand. It can happen due to high productivity, a decrease in demand, or due to the contracting money supply in the economy. In the short term, deflation is good news for consumers as the price of commodities drops. Moreover, the purchasing power of the currency 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, it is not easy to curb deflation through quantitative easing.
The increased value of the dollar creates a liquidity trap. Investors are wary of investing in stocks and other risky assets as cash is the best investment during such a period.
How Elon Musk’s Warning Will Affect Crypto
The crypto market is strongly correlated with the general market, especially with tech stocks. It is also a considerably more risky asset. If Elon Musk’s deflation warning holds, the crypto market can see a major liquidity crisis.