Last Updated on November 5, 2024
Do all fiat currencies go to zero?
History says that they do and common sense suggests that on long enough timeline the failure of every fiat currency is inevitable.
Even Charlie Munger thinks so:
“The safe assumption for an investor is that over the next 100 years the currency’s going to zero.”
Fiat currency cannot be sustained over the long term because it is not supported by the market. It is implemented by coercion and therefore demand for fiat currency is artificial.
Fiat is backed only by trust in government. There is no scarcity and therefore it relies on competent management. While this may last for a little while depending on the political will, it is inevitable that the monetary authorities will eventually mismanage the currency and inflate it into oblivion.
Just as nations and empires rise and fall, so too do their fiat currencies. All that remains from empire to empire is the sound money that has market demand.
Here are the three reasons why all fiat currencies go to zero.
1. Fiat Currency Is Not Supported By The Market
The free market, when unhampered, chooses hard money.
Hard money is a money where it is difficult to create new units and therefore where the supply is limited.
Examples of hard money in human history are shells, cows, salt, whales teeth, gold, silver and Bitcoin.
These objects were chosen as money by the market, they were not decreed into money by governments.
Governments certainly co opted this free market money, most famously in the form of gold and silver coins stamped with the image of the sovereign. But they chose gold and silver to adopt because of the market value.
By contrast, fiat currency is not freely chosen by the market. It is imposed upon the market by legal tender laws. These laws require citizens to pay their taxes in that currency and force merchants to accept it.
This coercive aspect creates demand the fiat currency that otherwise wouldn’t be there without the legal tender laws.
What this means is that the demand for fiat currency is artificial.
People are prepared to hold it temporarily if it is a somewhat effective store of value and medium of exchange. But if it fails to hold its value, people will use the currency to buy hard assets such as precious metals and real estate instead.
Eventually, the regime that issues the currency will fail to maintain the legal tender law. Either the regime itself will collapse, the monetary system will be reformed or the government will abandon the coercion of legal tender.
2. Fiat Currency Is Backed Only By Trust In Government
Jim Rickards in The New Case For Gold makes a convincing argument that fiat currency, in particular the US Dollar, is shadow backed by the eight thousand tons of gold that the US has.
But the US Dollar is not convertible into gold. You cannot redeem your Federal Reserve Notes for gold at the US Treasury.
Therefore, that gold gives confidence to the US Dollar system but not backing. There is no gold standard.
Instead, the Dollar is backed by trust and confidence in the US Government and the Federal Reserve.
The public trusts that the monetary authorities will manage the currency well and preserve its purchasing power.
The problem is that good management cannot last indefinitely. A time will come, whether through an external crisis or self-inflicted means, when the currency will be mismanaged.
It will be debased, its value eroded and it will eventually be rejected. This has happened to every fiat currency in history.
When this occurs, the holders of that currency dump it in favour of hard assets, further reducing the demand and thus the value of the currency.
When the trust and confidence that backs the currency disappears, so too does its value and it disappears into the dustbin of history.
3. Empires Rise and Fall As Do Their Currencies
The strength of a currency is related to geopolitical power.
A strong currency creates economic and military power which reinforces the strength of the currency.
The reverse is also true in decline.
No power stays powerful forever. And no fiat currency stays strong forever.
History is littered with examples of declining empires debasing their currency in order to try and stop the inevitable decline.
That debasement might be reducing the precious metal content of the coinage or printing paper money.
Russia entered hyperinflation soon after the fall of the Soviet Union.
Germany entered hyperinflation soon after her defeat in World War One.
France printed money as the King couldn’t manage the state finances and plunged the country into revolution.
Rome debased the denarius as the power of the empire waned.
We can expect the fiat currencies of today’s powerful nations to one day join those historical failures.
And when they do, what will remain is hard money that has a market demand.
What You Can Do To Protect Yourself
The simple protection against the debasement of fiat currencies is to minimise the amount that you hold.
Keep some on hand for day to day living expenses, but other than that seriously review the quantity that you hold.
Rather than saving in fiat, you could save in a superior form of money like gold or Bitcoin.
Or you could trade your fiat for productive assets like real estate or stocks.
All these things are denominated in a fiat currency but they are not fiat currency. They will retain their value regardless of whatever changes occur to an individual currency or the fiat currency system as a while.
The wealthy have always stored their wealth in assets rather than money and there is nothing to stop you from taking the same course.
Conclusion
All fiat currencies go to zero because they are not sound money.
They are politically managed with no limitations on new supply.
The market will not support fiat currency in the long term as people prefer to store their wealth in hard money and other hard assets like real estate.
Eventually, every fiat currency is debased to the point where it is totally rejected by the market or abandoned by the very government that issued it.
Sources
Rickards, James. The New Case for Gold. London: Penguin Business, 2019.
Image Credits
Indian Rupees by Ruxpien.com on Unsplash
