The End of Fiat Currency? - The Forecast

The End of Fiat Currency?

The End of Fiat Currency?

For millennia, money has been used as a stand-in for items of value, but what happens when a nation’s currency is no longer backed by anything more than a promise? During the later portions of the 20th century, America transitioned from gold backed currency to fiat money. Like the fall of Rome, the debasing of the U.S currency lead to massive inflation. When looking at the debt of the United States, it is evident that programs such as pension funds and social security will fall victim to this upcoming fracture in our economy. The fiat system has enabled the federal government to spend as it pleases, leading to mountains of bad debt, threatening the security of our financial system.

With the Nixon administration’s removal of the gold standard, the dollar’s purchasing power rapidly declined. Prior to this, one United States dollar could be converted into one dollar worth of gold, keeping our currency grounded within a tangible asset. After the gold standard was abolished in 1971, hyperinflation would dominate the 70s, as the buying power of the dollar continued to diminish. The removal of the gold standard by Nixon allowed for politicians to take deficit spending to a new level, creating the massive debt bomb we see today. When comparing ancient Rome with the United States, it is clear to see similarities within their economic declines. During its twilight, the Romans debased their currency by lessening the purity of their coins, leading to inflation in the Roman economy. With the abandonment of the gold standard, inflation would reach all-time highs, going from a 2% average to double digits. From history’s scope and scale, we can see this crisis repeated in nearly all declining civilizations, providing us with a warning we failed to heed.

When Americans think about the debt crisis, they often imagine countries such as China or Japan being the largest holders, but it is the American people the government mostly owes. As of 2019, the U.S Government owes only $1 trillion to China, while it owes $5.5 trillion to pensions funds. However the biggest creditor would be public bonds, clocking in at $16 trillion. With bondholders receiving next to nothing, it raises the question of whether the money will be paid back. When the debt crisis finally comes to a halt, it will be the people relying on pension funds and public bonds who will get hurt the most.

Having a limitless supply of money to use, the fiat system has allowed reckless government spending to endanger millions of Americans’ livelihoods. While this debt bubble will be blamed on a multitude of factors, it should mainly be attributed to the cessation of the gold standard. Like in the present, history has shown us that during times of decline, governments will devalue their currencies, leaving their problems for posterity to deal with. Now with trillions owed to bondholders and pension funds, things have never looked more precarious for the American economy since 2008. When this house of cards finally topples, governments will likely move away from fiat money, seeing its danger, and towards asset-backed currencies.