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The death of Fiat currencies?

September 1, 2020 By Mircea Vasiu

Five decades after the famous Nixon speech in the 1970s, fiat currencies face the test of their lifetime. Gold is on the rise, Bitcoin correlation with gold reached very high levels, and suddenly fiat currencies have competition.

It took a pandemic to realize that fiat currencies, eventually, die. Is this true?

History Supports the Thesis

A study of over seven hundred different fiat currencies stated that there is no fiat currency on record that has held its value in the long term. By long term, think of a century or more.

Moreover, more than 150 currencies examined were destroyed by hyperinflation. Another 12% were revoked by independence. Furthermore, about a quarter of the fiat currencies studied were “monetarily reformed”. Finally, 23% of them are still in circulation.

It means that out of the 23% of the currencies that are still around, they will have one of the outcomes listed above. During the pandemic, central banks and governments raced to issue new money and send it to the economy – effectively diluting the value of money. Or, debasing the currency, as economists like to say.

Fears of inflation are everywhere. Hyperinflation, therefore, is more likely to be the cause of death for the rest of the currencies, rather than independence, and so on. But there are some things to consider before declaring the death of money as we know it.

First, money stopped flowing. Despite huge amounts of fiat currencies issued and sent to people, the savings rate keeps rising. People are afraid to spend, uncertainty is everywhere, and the economic benefit fails to appear. All this time, the central banks issued new money, the velocity of money dropped to an all-time low. Hyperinflation without the velocity of money rising is just not possible.

Second, central banking evolved in time and reached new levels. Debasing a currency is not that easy as it was in the past, just like it is easier for the central banks to intervene and push a currency in the right direction.

What is funny is that during regular economic times, all the voices screaming now and warning about hyperinflation were silenced for decades. Suddenly, the central banks offered a reason.

However inflation or fear of inflation is the thing that sells. Just like in regular news – fear sells more than good news. Therefore, it is normal for people to focus now on inflation since this is all they hear all day.

However, why not put it the other way around. Instead of focusing on the fact that all but 23% of the currencies disappeared and assuming that these will do so too, why not think that the best of the fiat currencies survived?

Money will never die. In one form or another, it will find a way to survive, or humankind, as a species, will cease to exist.