A strategist at Deutsche Bank has written a paper discussing the start of the end of the fiat currency system. Could this be an opportunity for digital currencies to replace it?
Deutsche Bank strategist Jim Reid has written that the dominance of the fiat system ‘is inherently unstable and prone to high inflation.’ He adds that the offsetting deflationary shock that has maintained it since 1980 is beginning to change course. As a result, he believes that in the next 10 years, the fiat system will be ‘seriously tested,’ according to Business Insider.
Reid argues that inflation has been controlled due to the growth in the global working-age population and China’s economic emergence in the 1970s. Through externally controlled inflation, governments and policy makers are able to respond as needed. As the report writes this means more money printing, increased leverage and loose policy.
It’s not usually this easy as inflation would have normally increased with such stimulus and credit creation, said Reid. In fact, it could be argued that this external disinflation shock has perhaps ‘saved’ fiat currencies.
Reid adds that any changes in the cycle could eventually spell trouble for the fiat system. As the working-age population decreases with a shortage in supply and an increase in demand, inflation will increase.
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.
Reid believes that as inflation increases people will begin to lose confidence in the fiat system. This then poses the question: could digital currencies provide the answer?
According to CoinMarketCap, the combined market value of all digital currencies is valued at just under $194 billion. Bitcoin is currently trading at $7,026, with a market cap worth $117 billion. With increasing confidence aimed at the crypto market, it is quickly becoming a viable alternative to fiat currencies. For many already it is proving a lifeline particularly those in countries that are facing an economic crisis such as Zimbabwe and Venezuela.
Of course, for bitcoin to become the saving grace and replace the fiat system it needs to beat the likes of Visa and Mastercard.
Billionaire investor Mark Cuban recently said that he considers the digital currency as a store of value rather than a currency because of its limited capacity to process transactions. At present, bitcoin can only manage six per second whereas Visa and Mastercard can process thousands.