As Our Money Hits the Big 5–0, Is It Still Fit For Purpose?

Or does middle age mean passing the baton?

On Aug. 15, 2021, the money we use officially turned fifty years old. In human terms, this is an important milestone, but in the financial world celebrations were, well, muted.

Of course, there has always been and always will be money in some form, but only a relatively small number of people understand that the money we use on a day-to-day basis is barely out of the “experimental” stage.

In fact, I am personally older than our entire global monetary system, a thought I find utterly fascinating to this day.

Prior to August 1971, we had been using, at least in some way or another, a gold-backed system which limited the money that could be created by central governments around the world. But when Bretton-Woods sceptic French President Charles de Gaulle started the process that would ultimately see his successor, French President Georges Pompidou, send a warship to New York to collect the gold held on their behalf by the Federal Reserve Bank of New York, it marked the end of the era.

President Richard Nixon announced to the nation in a carefully timed TV broadcast (it went out on a Sunday evening to a unexpecting audience) that the gold standard was over. From that day on, currencies would float against each other, and their respective values would be judged on the merit of their issuing governments, economies and monetary policy.

The age of “fiat” money — that is money not backed by an actual commodity and given value by decree — was upon us. The word itself is Latin and is often translated as “let it be done” or “it shall be.”

A whole new (financial) world

Initially, some exchanges were so uncertain about the dollar’s value in the wake of the news that they refused to accept them. It’s difficult for those of us who were not there to imagine the mighty dollar being refused anywhere in the world, but, for a short period, this was indeed the case.

But, as the dust settled, governments and individuals quickly adjusted to the new system. Arguably, fiat currency could be credited for raising the standards of living for millions of people, helping create global prosperity and even contributing to scientific breakthroughs, all financed by a new form of leveraged debt that hitherto had not been possible.

But it came at a cost. Crashing assets bubbles, wildly swinging economic cycles and impossible-to-repay debt levels became standard features, often solved (temporarily at least) by simply printing more money.

But there’s no such thing as a free lunch. Whilst you can print as much money as you like when you’re not tied to a physical commodity, it has its own — often fatal — cost.

Inflation — The slow death

The trouble with the inflation that most of us are used to in the West is that it represents a slow, creeping death of a currency, rather than a spectacular and bloody crash. For the most part, we don’t notice it except on the odd occasion when we buy something familiar and we suddenly acknowledge that is definitely more expensive than it was before.

This often leads to statements along the lines of “I remember when [insert widget name] cost [insert seemingly impossible low price] and you still had enough change left over for [insert other seemingly impossible-to-achieve feat]” that are often ridiculed by any member of the younger generation who happens to be in earshot.

However, once delivered, we’ll simply carry on with what we were doing previously until, of course, the next time we’re prompted to inform anyone who’s listening about how much better the purchasing power of [insert currency here] was back in the day. We accept it, because it has always been so.

For those of us who live in Europe, the U.S. and other “solid” economies, it’s difficult for us to imagine our money devaluing so fast you can actually see it happening in real time. That effect is called “hyperinflation,” and countries are generally considered to be experiencing it if its official inflation rates surpass 50% per month.

Hyperinflation can be a sign of all sorts of underlying economic trouble, and, in simple terms, occurs when government body responsible for the currency concerned issues too much new money, leading to an excess supply and a loss of confidence by its users.

Usually, the only way out is to issue a whole new currency with a very high exchange rate for the old (eg 1 New Dollar =1,000,000 Old Dollars), but even this does not guarantee success if there is an underlying lack of confidence in the central government. Just ask a Zimbabwean.

What is fascinating is that we now almost accept hyperinflation as a normal part of the medium- to long-term economic cycle.

This is neatly demonstrated by looking at incidences of currency hyperinflation over the last 320 years, especially if we split them into three distinct eras.

Era 1 — From 1700 to 1900

Gold backed notes in some form or another were fairly common in most advanced economies by at least around 1700, but the first recorded hyperinflation event didn’t start until 1790 in France, a year after the revolution. It officially peaked in August 1796 at a rate of around 304%, according to Steve H. Hanke and Nicholas Krus’ famous “Hyperinflation Table” produced in 2012, which appeared in a CATO working paper.

At that rate, prices double every 15.1 days, making any sort of long-term planning all but impossible.

This was a result of a post-revolutionary council issuing a purely paper backed currency, known as the assignat, in a poorly thought out attempt to boost the economy. In only five years, its purchasing power fell by 99% and the effects, predictably, were disastrous. As a result, gold and silver transactions were re-instated in December 1795.

However, in this period from the widespread inception of gold backed notes to 1900, only that one period of hyperinflation was officially recorded, giving us an average of one event every 200 years. On a single data point, that’s hardly conclusive.

But all this was about to change.

Era 2 — From 1900 to 1971

While most countries remained on some form of gold standard during this time, two world wars caused some of them to temporarily abandon it as they looked to finance their war machines.

Between 1900 and 1944, when the Bretton Woods agreement created a new monetary standard via the U.S. dollar, 10 countries had seen their currencies collapse into hyperinflation either as a direct, or indirect, result of war, including Greece, Russia, China, Poland, Austria, Hungary and Germany, according to an analysis of the data provided in the CATO paper by Hanke and Krus.

Between 1944 and 1971, only five more hyperinflationary events were recorded, and all of them in the space of the four years after Bretton Woods. This included the world’s highest ever recorded inflation rate by Hungary in July 1946. In this month, the country’s inflation rate reached an impossible-to-imagine 41,900,000,000,000,000%, meaning that prices were doubling every 15 hours.

So, just 48 years into the twentieth century, the average currency collapse event had gone from a 1-in-200-year occurrence to a 1-in-3.2-year event. Yet, on the face of it, Bretton Woods worked. By the time Nixon “temporarily” called time on the arrangement in August 1971, no more hyperinflationary events had been recorded, meaning the true average for the period 1900–1971 was actually closer to 4.73 years.

And, in almost every single case in that three-century time span, the underlying cause had been war.

From this point onwards, governments would effectively “promise” that the currency you and I use had value loosely based on economic, monetary or military policies.

What could possibly go wrong?

Era 3 — From 1971 to today

Between 1973 and 2012 (the date at which the Hyperinflation Table was compiled) there was a significant jump in currency devaluation events, with 40 recorded in that timescale.

Since 2012, we can safely add Iran, Venezuela, Argentina, Syria, Suriname, Zimbabwe (again), Lebanon, Sudan and South Sudan to that list, although there are still others we could make a case for.

The last updated watch list issued by the International Practices Task Force (IPTF), which monitors the status of highly inflationary countries, also makes mention of Angola, Haiti, Liberia and Yemen as being “at risk” of very high inflation rates this year. It’s possible that the latest developments in Afghanistan may mean new names being added.

Even when working only from confirmed and accepted cases, we can see that the average time between events has now dropped from 4.73 years in the last period to just one year in this one, according to my own personal analysis. In other words, a hyperinflationary event is now a statistical certainty each and every year under the current fiat regime.

So, it turns out there is good reason why we accept this process as normal in the modern era. It’s because it is.

Not only that, but for the first time, we are also seeing significant overlap in devaluation events, i.e. multiple currencies failing simultaneously. This has resulted in many hundreds of millions of people seeing their wealth decimated and, as ever, this is felt disproportionately among the poorest.

This, of course, is unsustainable in the long-term and, in reality, few economist would argue that point. There is, however, enormous (and passionate) debate over where we go next.

The next 50 years

Although it’s unlikely I’ll see out the entirety of the coming fifty year period, it seems even less likely that will fiat will either, at least in its current form.

This especially applies to the the global reserve currency, the U.S. dollar. Money printing has accelerated massively in the last year or so, in particular as the economic impact of the pandemic has taken hold.

Dan Morehead of Pantera Capital famously noted, for example, that the Federal Reserve created more new dollars in one month, June 2020, than had been created in the entire two hundred year history of the country until that point. And much more has been done since.

Many expect inflation rates to continue to increase and, as it does so on a scale that is physically noticeable, this leads to ever-accelerating price rises, as corporations aim to recoup their devaluation losses. At a certain point, this leads to practical issues — how many notes will you need to buy a coffee for $1,000 for example? What happens when the price for an average home runs into tens of millions of dollars?

Theoretically, it’s fine if earnings keep up with the same rate of expansion, but history shows us that this is not the case and those on fixed incomes— by far the largest majority of workers — will find themselves fighting a losing battle. This, as we already know, never ends well.

No, for this (and many other reasons), it’s almost certain that something will have to change, and it probably will be within our lifetimes. So, where do we go next? And how does the average person even begin to plan for this?

One thing is for certain: planning to keep wealth in any form of fiat currency is guaranteed to result in that wealth losing value over time, and with bonds yielding negative real returns and equities entirely dependent on the health of the underlying currency they’re based on, alternatives must be found.

Property, collectibles, precious metals, art (perhaps even in the form of Non-Fungible Tokens known as NFTs) are all options, but increasingly there is a growing awareness of the power of Bitcoin, the world’s first truly decentralized asset and payment system that is equally accessible to almost all on the planet.

After all, money has always been the product of our latest technology. It could be, in retrospect, that the rise of the development and adoption of this new financial approach could not have been better timed. We will see.

But in any case, the next fifty years will not be the same as the last. We live in exciting times, full of opportunity and pitfalls, and now, more than ever, the responsibility for our personal wealth lies with each and every one of us, whether we like it or not.

But, for today, and perhaps only for today, we should celebrate money’s half century. Perhaps we’ll raise a glass of champagne or two and wonder at all that it has achieved in that time and how many lives it has affected for better and, sadly, for worse.

Just be aware — and ready for — the hangover that may follow.


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Disclosure:

The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economicsand consultant to Luno.

Disclaimer:

This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

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