Inflation and Decentralized Currencies

By Sumay Lu, age 12, CEO of WEquil.School

In 1981 if you were to have $1 in US dollars it would be 0.53 Naira (Nigerian currency) which means that a dollar in Naira would be worth more than a dollar in US currency. Fast forward to 2021... $1 in US dollars would be 411 Naira...that is absolutely insane. So what caused this to happen?

Inflation is when a currency has declining purchasing power. This means that the same amount of money can’t buy as much. For example, let’s say an apple costs $10, with inflation, maybe a year from now the apple costs $11. This inflation then means that if I have $10 with me, I cannot purchase an apple now. Inflation is a pretty negative thing overall, mostly it affects consumers but can hurt businesses as well. This is because now the business has to pay more to their employees since paying them the same amount now is worth less than before. Let’s say that the company selling apples has multiple apple orchards and also hires people to go pick the apples. The company will be forced to pay the workers more because the same amount of money is worth less assuming the inflation is widespread and not just within the market for apples.

So how does inflation negatively impact people? There are a few ways that are pretty straightforward, like now people's money can’t buy as much as it used to. Once people see that inflation is happening a lot of people start panicking, and for good reason. Paper money doesn’t have any intrinsic value, this means that if people didn’t believe the money had value, the actual physical piece of paper would be relatively worthless. Part of what inflation is, is people not believing in a currency's worth. One way that people try to counter inflation is investing in things that do have intrinsic value, like physical objects and things like property and goods.

This is why the value of the US Dollar and the value of gold have a historically inverse relationship that you can see displayed in this chart: (link to source)

The orange line represents gold and the blue represents the US Dollar, specifically, the trade-weighted U.S. dollar index. As you can see, when people start losing faith in the dollar, the value of gold tends to go up. This is because gold has intrinsic value since it is a physical material and can be used to create things like jewelry. But gold is just one example of physical goods that people start to invest in when there is speculated inflation.

So why does inflation usually start to happen? There can be different root causes in different scenarios, but a common reason why is the printing of money. This is because when an economy is flooded with more money to spend, then there will be more spending! More spending means that demand shoots up while the supply does not increase significantly. This means there are more people wanting to buy things than there are things to buy. Then, prices start to go up in order to counter this and thus inflation starts to happen. It is a domino effect where if some goods and services start to go up in price, then people will start to see that their purchasing power has gone down, and then companies are pressured to pay their workers more since the same amount of money is now worth less. So in order for those companies to counter that, they have to raise their prices since they are making less money with increased spending on workers' wages. As you can see, this will then start to affect the prices of even more goods and services with the added pressure of increased demand, and no significant increase in supply. If you would like to learn more about supply and demand, check out Aila’s article on what supply and demand is!

... article continues at the link below...

https://www.wequil.com/post/inflation-and-decentralized-currencies

Sumay will be presenting this article along with other students at WEquil.School who present their projects every Saturday at 2pm EST on our Facebook Page. The theme this Saturday is "Africa" and our hosts include entrepreneurs building Blockchain technology from Nigeria as well as developers in our team from Kenya.

WEquil.School is free to join along with all the learning communities across WEquil Group.

Sincerely,

Joe WEquil (Sumay's Dad)

Founder and CEO of WEquil Group

www.WEquil.com