Stagflation: When the Economy Gets Stuck

TL;DR Imagine the worst-case scenario: the economy is struggling, prices are skyrocketing, and your job opportunities are dwindling. This is stagflation—a toxic combination of economic stagnation, high unemployment, and rising inflation. Unlike other economic problems, stagflation and inflation are fought with opposing methods, making this situation particularly complex to manage.

The Economic Paradox that Confuses Analysts

Historically, economists have noticed an anomaly: when the economy slows down, prices should fall. Conversely, when prices rise, the economy should accelerate. But stagflation breaks this rule. The term was coined in 1965 by British politician Iain Macleod, but it became familiar to the general public only in the 1970s.

Stagflation describes a state in which a country simultaneously experiences:

• Negative or minimal economic growth (GDP is not growing)
• High unemployment rates (few job openings)
• Persistent inflation ( prices continue to rise )

This creates a dilemma for central banks and governments: strategies to combat inflation often worsen the recession, and vice versa.

Why Does It Happen? The Roots of Stagflation

The Clash of Conflicting Policies

Central banks (such as the Federal Reserve in the USA) control the money supply through monetary policy maneuvers. Governments, on the other hand, act on demand through fiscal policy and public spending. When these two instruments work in opposite directions, economic chaos is inevitable.

Practical example: A government raises taxes (reducing the disposable income of citizens), while at the same time the central bank practices quantitative easing and lowers interest rates (injecting more money into circulation). The result? Weak consumption on one side, but excess liquidity and inflation on the other.

The End of the Gold Standard

Before World War II, most economies pegged their currencies to gold. This system—known as the gold standard—acted as a natural brake on money issuance. When countries abandoned this mechanism and embraced fiat currency (unsupported money), central banks gained complete freedom in creating money.

On one hand, this flexibility helped financial institutions respond to economic crises. On the other hand, it significantly increased the risk of uncontrolled inflation.

Shock in Production Costs

When the price of essential raw materials—especially energy—explodes, companies pay more to produce goods and services. These additional costs are passed on to consumers through price increases. If at the same time consumers' purchasing power falls ( because wages do not keep up with inflation), demand collapses. Result: stagflation with a high number of unemployed and rising prices.

The Historical Case: The OPEC Oil Embargo of 1973

1973 marked the first major episode of modern stagflation. The Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on countries that supported Israel in the Yom Kippur War. The oil supply collapsed vertically, prices skyrocketed, and the Western production system went into crisis.

What happened:

• Energy costs doubled or tripled
• Supply chains fractured
• Inflation rose to double digits in many countries
• Economies entered recession

Central banks tried to stimulate growth by lowering interest rates, but this move failed to win against inflation driven by energy costs. Western governments found themselves trapped: they could not stimulate the economy ( whose real problem was the restricted supply) and they could not contain inflation without triggering an even deeper depression.

How to Fight Stagflation? The Three Schools of Thought

Monetarist Approach: Priority on Inflation

Monetarists argue that inflation is public enemy number one. Their recipe: drastically reduce the money supply, raise interest rates, make loans expensive. This reduces spending, demand falls, and prices drop.

Problem: This policy further depresses economic growth in the short term.

Supply-Side Approach: Increase the Supply

An alternative is to focus on increasing the supply of goods and services. How? By reducing production costs, subsidizing strategic sectors, investing in energy efficiency, and controlling energy prices where possible.

If supply increases, prices naturally decrease, productivity rises, and unemployment falls. It is a less painful strategy, but it requires coordination between government and market.

Free Market Solution: Let It Be

Some economists believe that free markets self-correct: when prices become unsustainable, consumers stop buying, demand decreases, and prices naturally normalize. Labor redistributes towards more efficient sectors, and unemployment gradually decreases.

The problem is time: As Keynes said, “in the long run, we are all dead.” This solution may require years of economic suffering.

Stagflation and Crypto Markets: A Complex Scenario

The relationship between stagflation and deflation in the cryptocurrency market is anything but linear. Here's what could happen:

Contraction of Crypto Demand

During a stagflation characterized by negative economic growth, consumers have less disposable income. Retail investors reduce high-risk investments—such as cryptocurrencies—to maintain liquidity for daily expenses. Additionally, large institutional investors tend to reduce exposure to volatile assets, preferring to shelter in safe assets.

Likely outcome: Downward pressure on Bitcoin and other cryptocurrencies.

The Effect of Interest Rates

Governments combat inflation by raising interest rates. This makes bank savings more attractive and loans more expensive. With higher rates, speculative investments in crypto become less appealing.

Once inflation is controlled, interest rates drop, liquidity increases, and risky assets—including cryptocurrencies—tend to benefit from new demand.

Bitcoin as a Hedge: A Debated Topic

Many argue that Bitcoin (, with its limited supply of 21 million units), is a good hedge against inflation. If you hold fiat money without earning interest during inflation, your purchasing power erodes. Bitcoin, theoretically, preserves value due to its programmed scarcity.

However: This topic works better in the long term. During acute episodes of stagflation, the correlation between crypto and stock markets increases, and Bitcoin may suffer along with other risky assets. The search for liquidity during periods of acute economic crisis has often prevailed over the narrative of “store of value.”

In Summary: Understanding Stagflation to Navigate Uncertainty

Stagflation remains one of the most challenging economic phenomena to manage. Inflation and deflation traditionally require opposite interventions, and when they strike simultaneously, monetary authorities find themselves in a dead end.

Observing economic history—from the OPEC embargo of 1973 to contemporary periods of inflation—it is clear that stagflation requires creative approaches that combine demand control, supply increase, and coordination between fiscal and monetary policy.

For cryptocurrency investors, the lesson is simple: during periods of stagflation, closely monitor interest rates, money supply, GDP trends, and unemployment rates. These macroeconomic indicators often determine market sentiment more than the technical fundamentals of individual blockchains.