Elon Musk's Deflation Warning and Crypto: What It Means

Elon Musk, the millionaire, has a dire forecast for the American economy.

Given the Fed's hardline stance against inflation, Musk thinks the economy is moving towards deflation. If Elon Musk's warning is accurate, it won't be good for the cryptocurrency market. He thinks that if the Fed raises interest rates much again, deflation could result. On September 21st during the FOMC meeting, the Federal Reserve will announce its decision to raise interest rates again.

The Fed's monetary policy is decided upon by the Federal Open Market Committee, or FOMC. It is in charge of managing the US economy's money supply.

What Effects Deflation Has On The Stock Market

Deflation is a condition in which prices for products and services fall from their previous levels. Major economies like the US compare the prices of a "basket of goods and services" across time to examine the price shift in the economy. An essential statistic for measuring just that is the Consumer Price Index, which is published by the US Bureau of Labor Statistics.

When the supply outpaces the demand, inflation results. High productivity, a drop in demand, or a tightening of the money supply in the economy can all cause it. Declining commodity prices make deflation excellent news for consumers in the near term. Additionally, the currency's purchasing power rises.

Deflation, however, can cause the economy to shrink over time. Deflation may be more damaging than inflation, according to economists. The Fed can simply reduce inflation by tightening monetary policy. But using quantitative easing to stop deflation is difficult.

There is a liquidity trap brought on by the rising value of the dollar. Cash is the ideal investment during such a time, so investors are leery of investing in stocks and other hazardous assets.

The Impact of Elon Musk's Warning on Crypto

The cryptocurrency market has a high degree of market-wide correlation, particularly with tech stocks. Additionally, it is a much riskier asset. A severe liquidity crisis may occur in the cryptocurrency market if Elon Musk's deflation forecast is accurate.