The surge of post-pandemic inflation blindsided the world’s central banks. Despite decades of model-building and unprecedented policy interventions, the core mechanisms driving modern price dynamics remain obscured. As Financial Times columnist Gillian Tett observed in her article (There’s a black hole where central banks’ theory of inflation should be, December 5, 2025), there is a “black hole” where a coherent, predictive theory of inflation should be.
At Truth Cartographer, we argue that this black hole is not merely theoretical; it is operational. Central banks are failing because their models are structurally unable to see the massive parallel financial system that has emerged: crypto as shadow liquidity.
The Failure of Traditional Inflation Frameworks
Central banks currently rely on backward-looking data and discredited frameworks to guide forward-looking policy. This creates the “black hole” Tett described: they know they must act, but they are “flying blind” on the true mechanism of impact.
The traditional models have broken down in the face of modern shocks:
- The Phillips Curve: This core framework, which posits an inverse relationship between unemployment and inflation, has demonstrated a weak and unstable correlation post-2008. It struggled to explain simultaneous high inflation and low unemployment, and it entirely fails to capture inflation driven by sudden supply chain shocks or geopolitical disruption.
- Monetarist (Money Supply): The idea that inflation is solely a function of money supply (M2) growth was undermined when Quantitative Easing (QE) failed to trigger hyperinflation. While M2 growth is now shrinking, the actual liquidity conditions remain opaque due to capital migration.
Without a robust, consensus-driven theory that accounts for global supply chains and non-traditional monetary channels, policy becomes purely reactive, relying on trial-and-error interest rate adjustments that carry immense market risk.
The Parallel System: Crypto as Shadow Liquidity
The primary source of the central bank’s theoretical blind spot is the rise of crypto as shadow liquidity—fiat-origin capital that migrates into crypto assets and operates outside official monetary aggregates (M0, M1, M2).
Central banks intentionally exclude crypto from monetary tabulations because:
- Legal Definition: Crypto assets are generally classified as speculative assets or commodities, not “money” (currency, deposits, etc.) in the legal frameworks defining M2.
- Volatility: They argue crypto is too volatile and lacks the stability required of a monetary instrument.
This exclusion creates the Silent Leak:
- Migration, Not Destruction: When institutional investors or corporations transfer $10B from bank deposits into a Bitcoin ETF, official M2 shrinks. Central bank models interpret this as liquidity destruction or demand contraction.
- The Shadow Multiplier: However, that liquidity has not vanished; it has simply migrated to a parallel rail. That same Bitcoin or Stablecoin can then be collateralized, lent, and rehypothecated multiple times within DeFi protocols. This creates a leverage and liquidity loop that operates entirely outside the central bank’s visibility.
The central bank misreads liquidity conditions because their aggregates are porous, failing to capture crypto’s parallel multiplier effect.
The Metrics Misread: Divergence in Core Data
The structural exclusion of crypto flows means five core central bank metrics are now inherently less reliable, leading to distorted policy decisions.
1. Money Supply (M2)
- Crypto-driven Distortion: M2 overstates contraction or expansion in fiat liquidity.
- Mechanism: Fiat migrates into crypto (e.g., via ETFs); this shadow capital then expands effective liquidity through a multiplier in DeFi.
- Diagnostic to Track: Stablecoin net mint/burn metrics compared directly against official M2 changes.
2. Credit Growth
- Crypto-driven Distortion: Official figures underestimate system-wide leverage.
- Mechanism: Crypto-collateralized lending and rehypothecation happen entirely outside bank credit statistics.
- Diagnostic to Track: On-chain lending Loan-to-Value (LTV) ratios, aggregate open interest in derivatives, and funding rates.
3. GDP
- Crypto-driven Distortion: GDP understates true cross-border and digital economic activity.
- Mechanism: Stablecoin-settled trade, remittances, and services bypass traditional national accounts and bank clearing houses.
- Diagnostic to Track: Stablecoin settlement volumes compared to official trade and service statistics.
4. Balance of Payments (BoP)
- Crypto-driven Distortion: BoP underreports capital inflows and outflows.
- Mechanism: Offshore stablecoin remittances and tokenized asset flows bypass standard reporting requirements and capital controls.
- Diagnostic to Track: On-chain cross-border transfers compared against official BoP figures.
5. Velocity of Money (money movement)
- Crypto-driven Distortion: Official metrics understate transactional intensity.
- Mechanism: Stablecoins turn over far faster than fiat deposits across 24/7 exchanges and L2 networks, yet this velocity is unmeasured.
- Diagnostic to Track: Stablecoin turnover ratio compared to fiat payments velocity.
The Policy Consequence
The most critical consequence lies in monetary transmission. The Fed may implement rate hikes to tighten fiat conditions, but this tightening can be immediately offset by an expansion of crypto-collateralized lending, effectively muting the policy impact. Central banks are trying to steer a ship while ignoring the fact that a significant portion of the capital has launched its own parallel speedboat.
How Crypto Fills the Theory Gap
Crypto doesn’t just create a hole in central bank theory—it actively fills the resulting vacuum by offering a coherent counter-narrative and a practical hedge.
- Hard-Coded Scarcity: Bitcoin’s fixed 21 million supply provides a powerful, algorithmic narrative of insulation against fiat inflation. Where central banks must rely on discretionary, imperfect human judgment, crypto offers certainty.
- Institutional Conviction: Institutions are not just betting on the AI trade for growth; they are simultaneously accumulating crypto as a liquidity hedge. They treat crypto not as a speculation, but as ballast against fiat fragility. As documented in our earlier work, “Crypto Prices Fall but Institutions Buy More,” this accumulation during price weakness is a clear signal of long-term conviction.
- Policy Inversion: Every inflation misstep, every broken Phillips curve correlation, and every central bank communication error is instantly reframed by the crypto market as validation of its design. The institutional flight to this “structural hedge” is the market’s collective response to the “black hole.”
Conclusion
Gillian Tett’s articulation of the inflation theory gap is crucial. However, the missing link is not philosophical; it is operational.
The GDP, M2$, CPI, BoP and credit growth metrics are all less reliable because central banks measure only the fiat aggregate, ignoring the increasingly systemic shadow liquidity parallel system.
Crypto has become a parallel liquidity machine with its own mint, multiplier, and velocity. Until that liquidity is measured and integrated into monetary models, official data will continue to mistake migration for destruction and operational optics for solid mechanics, leaving the global economy exposed to uncounted and unmanaged risks.
Disclaimer
This publication is for informational and educational purposes only. It does not constitute financial, investment, or legal advice. Markets evolve, regulatory interpretations shift, and macro conditions change rapidly; the analysis presented here reflects a mapping of the landscape as it stands, not a prediction of future outcomes. Readers should conduct their own research and consult qualified professionals before making financial decisions.