Why we might need to take inflation positivity with a grain of salt
You could be forgiven for thinking things are starting to normalise – whatever that means. But I’m afraid I’m going to have to disillusion you by taking just two of the real issues that have emerged in recent weeks, both related to the war in Ukraine and to food.
You may recall the joy that met the Ukraine grain deal, where Russia allowed ships to move through the Black Sea. While, admittedly, it was still under the watchful eye of Russian guns, some 33 million tonnes got out.
Part of Russia’s justification for the move was that the grain was humanitarian aid for the world’s poorest countries. But, guess what: only 3% or so got there. The rest went to the most affluent nations who could afford to pay for it. And guess what again: the higher prices were passed on to consumers, hence the higher rate of food inflation than the overall rise in the cost of living.
Now, Russia has said it won’t allow the exports anymore. As a result, the prices of grain products could potentially rise even further and there is a real possibility of famine in various places across the globe.
It has, however, linked a renewal of the deal with the Togliatti ammonia pipeline being re-opened. There was agreement that the ammonia should continue to flow through Ukraine – and Russia, of course, complied as it was in its own interest. After all, 2.5 million tonnes of ammonia at $1,500 to $2,000 per tonne is around $4 billion. But, Ukraine has yet to reopen the transit – and this has become another front in the new world of geopolitics we live in.
What’s so special about ammonia, you may ask. It’s used in the manufacture of fertiliser, and Ukraine and Russia are the two largest exporters in the world. No fertiliser means lower crop yields. Lower crop yields means less food. Less food means more famine and potential riots. And higher prices.
Arguably, to date, the West has had a relatively easy ride both with food and oil and gas, but the situation on the latter may be about to change as well. The Ukraine transit deal for gas is due for renewal in 2024, and the gavotte being danced around its renewal is a thing to behold. If a deal can’t be struck, prices next winter will almost certainly spike.
So, before everyone starts thinking inflation is licked, think again. As ever, America’s amazingly flexible economy has brought it almost to heel already, though everywhere else is still struggling – not least the UK.
What does all this have to do with crypto? Firstly, the conventional wisdom a couple of years ago was that crypto was a great hedge against inflation. I was personally convinced of that, but sadly – as so very often, and you will know economists are seldom right – I have been proven somewhat wrong. The best hedge was probably a supermarket basket of food.
Yet, through all of this upheaval the number of crypto wallets continued to increase. While it has meant Bitcoin trading volumes have fallen quite dramatically – when markets are flat or declining, people don’t tend to trade – nonetheless, more and more people are becoming interested in Bitcoin and other crypto projects.
Perhaps even more relevantly, the other important thing about blockchain technology is that it is supreme at logging and tracking provenance. Think of it like a sophisticated, enormous Excel spreadsheet, which can’t be changed once created.
I wouldn’t be at all surprised if the grain and lots of other products start being verified and tracked on a blockchain. Traders and businesses are increasingly going to have to prove they are not breaking sanctions, and there is already a burgeoning legal business in enforcing and avoiding sanctions. Using a blockchain is a perfect riposte.
We really are in uncharted territory and, as ever, it will hit when least expected with unintended consequences. Even so, it only strengthens the view that crypto has an important role to play in the future of the global economy – even if that is still to be defined in such changeable times.
Temple Melville is CEO of The Scotcoin Community Interest Company (CIC)