Many Fear the End of the Dollar, the Collapse of Fiat Currencies
The US dollar will collapse. Fiat currencies are ending rapidly. “The Biden–Yellen team will fulfill our worst fears of deficit spending, debt explosion and dollar collapse”–wrote, for example, Zerohedge. Only real assets, like physical investments, gold, real estate, cryptocurrencies, may survive.
This sort of opinion is very frequent since last spring, the beginning of the coronavirus-crisis. I agree inflation may jump in the next years, perhaps reaching the two-digit territory. I also think real assets is one of the best investments in the next 1-3 years. (Read: 8 Compelling Reasons to Watch Commodity Investments) But I don’t think fiat currencies will collapse or be replaced by other money types. Some years of money printing and higher inflation doesn’t mean the end of the world (and the fiat currencies) arrives.
The “N”-Word Currencies
It may seem strange how many currencies have an “N” in their international code. It stands for the word “new”:
- PLN=New Polish Zloty;
- RON=New Romanian Leu;
- PEN=New Peruvian Sol;
- MXN=New Mexican Peso;
- BGN=New Bulgarian Lev (in reality, the 4th Lev already…)
Other currencies don’t have “N” in their codes, like
- the Argentinian Peso (ARG),
- the Brazilian Real (BRL),
- the Zimbabwe Dollar (ZWL),
- the New Israeli Sheqel (ILS), or
- the Serbian Dinar (RSD).
But we know these countries also inflated their money to death before. Some countries must introduce brand new money every 2-3 decades. Their politicians seem to be addicted to inflationary policies.
The Biggest Theft in History is Inflation
There so many “new” currencies in the world because the old one lost all its value. In most cases, one million, one billion, or one trillion (1,000,000,000,000) of the old unit became one “new” currency. Old savings, bank accounts, banknotes, bonds, often got completely worthless after these currency reforms.
Were these high-inflationary periods a theft? Yes. The expropriation of savings of the people, the private property? Yes. Did fiat currencies fail after these hyper-inflation periods? Did currencies based on precious metals return? No, they didn’t.
How to Substitute Collapsed Fiat Currencies?
How could you substitute a fiat currency which value is declining, eroding? Cryptocurrency fans and “gold bugs” (persons who are extremely bullish on gold) think, with cryptos and precious metals. But, in the past, fiat money was substituted always by other fiat money. New zloty or leu, novo cruzeiro after the collapse of old Polish, Rumanian, Brazilian currencies. Or, sometimes, they use the fiat currency of another country:
After the Zimbabwean dollar was suspended indefinitely from 12 April 2009, Euro, United States dollar, Pound sterling, South African rand, Botswana pula, Australian dollar, Chinese yuan, and Japanese yen are used as legal tender. The United States dollar has been adopted as the official currency for all government transactions. (Wikipedia)
Finally, Is the End of the Dollar Coming?
The dollar underperformed most currencies of developed countries in 2020. With a reason, because of the unprecedented Fed easing measures and record coronavirus-crisis government rescue-packages. People are talking about the end of the US dollar for many years, especially since the Lehman Brothers-collapse in 2008.
But in the end, the dollar had never experienced inflation rates so high as other currencies in “developing countries”. The dollar never lost all its value, but this doesn’t mean it may never happen. Although, it seems to be unlikely. Because the effects of money printing can be also reversed. Last week, high officials of the Federal Reserve already mentioned the possibility of the “tapering”. They may stop money printing or even retire money from circulation. If the economy revives, high economic growth returns this year.
At the moment, central banks keep fighting with low inflation rates. A rate of around two percent, p. a. is considered as a “healthy level” of inflation. The question is, if they start tapering at the right time, too early (=more recession), or too late (=more inflation). We will see, but neither version must mean the collapse, the end of the dollar.
Do We Have Any Choice But to Inflate the Paper Money?
Is money printing in deep crises like this an error? What other choices do governments have? By history, crises before 1971. were much longer. (The year of the end of the Bretton Woods system, the end of currencies coupled to precious metals). Remember the “Great Depression” of 1929-1933? At least, approximately 4-5 years, in some countries, even more. But there was a much worse crisis before, most people didn’t even hear about:
The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1896, depending on the metrics used. (Wikipedia)
And the Financial Crisis, beginning in 2007 in the US, and 2008 in other countries? Only 2-3 years. The actual Coronavirus Crisis may last only 1-2 years if we are lucky. (Although, I’m not sure yet.) Crises seem to be shorter and shorter. Money printing is bad. But what other choices do politicians and national banks have? Sit down and wait? That could mean a much longer and deeper economic depression.
Conclusion: The End of the Dollar Is Not Near
In earlier decades, in the 70s, 80s, and 90s, the big problem of central banks was how to push inflation back. Today’s problem is how to generate some inflation, finally. But many other conditions changed in 30-50 years. (Globalization, demographics, automation, etc.). We will see if inflation can be contained, economic growth curbed and the planet preserved, too. It seems to be an impossible trinity. May the force be with humanity.
But I agree inflation may jump in the next years. If economic growth returns, central banks will readjust policies, retire part of the new money from circulation. I think if countries don’t print money, the crisis may be much longer or deeper. There is an old dilemma: Inflation, or unemployment. I’m sure if you have to feed your family, you would choose inflation, too.
But Buy Real Assets
Another conclusion is, real assets are also a good investment if you aren’t expecting the end of the dollar or the collapse of all fiat currencies. Buy some gold or silver, platinum, some crypto, some stocks, and real estate if you can…
“You have low or negative interest rates fueling inflation, and there are zillions of dollars available looking for returns. There’s a structural change to the way we look at commodities.” (Heber Cardoso on Bloomberg.com)