Deutsche Bank lead strategist Jim Reid believes we may be looking at the beginning of the end for the fiat currency system. Reid does not rule out the possibility of cryptocurrencies competing against government issued currencies and eventually taking over the global financial market.
In a recently released research paper, Deutsche Bank lead strategist Jim Reid went over the vulnerabilities of the fiat currency system with a fine tooth comb, criticizing their centralized nature and susceptibility of being easily manipulated by governments, authorities, and central banks.
According to Reid, the dominance of the fiat currency system since Richard Nixon decoupled gold from the dollar in 1971 “is inherently unstable and prone to high inflation”. Moreover, the disinflationary shock wave that has kept fiat currencies under control since 1980 is now beginning to back-pedal. Thus, any currency whose value is backed by the government that issued it could be “seriously tested” in the upcoming years, as claimed by the Deutsche Bank lead strategist.
“It’s possible that inflation becomes more and more uncontrollable and the era of fiat currencies looks vulnerable as people lose faith in paper money.”
“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 prioritize low interest rates and nominal growth over inflation control, which could herald the beginning of the end of the global fiat currency system that begun with the abandonment of Bretton Woods back in 1971,” Reid said.
Although a definitive replacement for fiat currencies is yet to be determined, cryptocurrencies could be an alternative.
Cryptocurrencies don’t face the problem of inflation: they don’t lose their value over time, since they are not issued by governments and they are designed to be finite. Given their open structure and decentralized nature, cryptocurrencies cannot be manipulated by any person, organization, or government.
Therefore, cryptocurrencies could potentially pose a threat to fiat currencies and eventually take over as the global monetary system.
“Although the current speculative interest in cryptocurrencies is more to do with blockchain technology than a loss of faith in paper money, at some point there will likely be some median of exchange that becomes more universal and a competitor of paper money,” Deutsche Bank lead strategist Jim Reid stated.
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