Is the world about to see the beginning of the end of the current fiat currency system? That’s the question posed by a new research paper from Deutsche Bank strategists Jim Reid and Craig Nicol, titled “The Start of the End of Fiat Money?” In the paper, the analysts examine the current fiat money system, discuss emerging trends that threaten its viability, and consider potential replacements – like Bitcoin.
The authors assert that the existing system would have collapsed decades ago if deflationary trends hadn’t emerged in the 1980s. Reid and Nicol argue that those trends are now reversing, which could result in a period of inflationary pressure that would place the entire fiat money system in jeopardy:
“Central banks and governments which have ‘dined out’ on the 35 year secular, structural decline in inflation are not able to prevent it rising as raising interest rates to suitable levels would risk serious economic contraction given the huge debt burden economies face. As such they are forced to prioritise low interest rates and nominal growth over inflation control which could herald in the beginning of the end of the global fiat currency system that begun with the abandonment of Bretton Woods back in 1971.”
The paper also suggests that cryptocurrencies like Bitcoin could step into any void left behind by fiat currency’s demise. The authors note that the current system relies upon centralized authorities and public faith in the governments that manage those fiat currencies. If those governments lose the ability to control inflation, they could lose the leverage they need to maintain control over monetary policy and the global economy.
The duo cites a number of other factors that could contribute to the end of the fiat money system, including demographic changes and the rise of populism in many areas of the world. With populism gaining strength, the pair believe that the world is preparing to enter a period in which governments may be forced to accrue more debt to satisfy growing demands from their nations’ lower-income and working-class populations. As the pair note, that would lead to inflation that could threaten the fiat money system.
According to the authors, the question we should all be asking is a simple one: “will fiat currencies survive the policy dilemma that the authorities will experience as they try to balance higher yields with record levels of debt? That’s the multi-trillion dollar question for the years ahead.”