Is traditional currency failing us?

Inflation is a hot button issue that has been getting an almost unprecedented amount of attention this year. With prices of consumer goods soaring as much as 9.1% annually, it’s no wonder inflation has been keeping us awake at night. In fact, an Ipsos survey released in October 2022 revealed that inflation is the number one concern globally.

Apart from day-to-day concerns about whether the cost of living will spiral out of control, the recent inflation fears have also sowed deeper doubts. Investors increasingly feel uncertain about traditional fiat currency, a system that has served us so well — until it didn’t.

Fiat currency, after all, is money issued by the government’s central bank. But are today’s governments' goals in line with ours? What effect do central bank decisions have on our wealth? Ultimately, can fiat still serve us in the longer term?

We’ll take a look at the state of fiat currency today and highlight trends that suggest people are turning away from fiat towards digital assets like Bitcoin.

US purchasing power, then and now

Fiat currency is a complex topic. However, we can begin to understand it by looking at the United States, hitherto the dominant player in the world economy.

Like most first-world economies, the US has suffered a decline in purchasing power over the past decades. A visualisation of this phenomenon shows us that the US dollar has declined a lot since 1913, the year the Federal Reserve System (or Fed) was created.

Source: HowMuch.net, a financial literacy website

Fiat money loses purchasing power over the years because goods and services get more expensive every year — in other words, inflation.

We may not feel the pinch from year to year, but these small differences compound dramatically over time. If you had US$100 in 1913, for example, it would only be enough to purchase US$3.87 of consumer goods today!

In addition, the supply of fiat currency is not fixed. Since it is not linked to any physical or digital asset, fiat can be issued by governments to steer economies to desired outcomes, such as stimulating sluggish consumer spending.

If this manipulation is not carefully managed, the total supply of money could exceed actual economic growth — which is how sustained inflation happens.

Today’s currency situation outside the US

Central banks, like Singapore’s MAS and the UK’s Bank of England, take their cues from the US Fed’s moves. For example, when the US Fed raised interest rates aggressively in 2022 — thereby tightening the supply of money — many countries followed suit.

Countries that do not follow this protocol may pay a hefty price since economies are very much interlinked in today’s globalised world.

Take for instance Japan, whose central bank kept interest rates defiantly low — a decision that sent the yen into free fall. As an intervention, Japan’s government bought yen on the foreign exchange market, racking up an estimated ¥2.84 trillion.

However, even following the Fed’s protocol isn’t a recipe for success, as the UK’s recent upheaval shows. After its new government announced widespread tax cuts, choosing to fund its spending by taking on high-interest debt instead, the pound plummeted rapidly.

Such crises expose the weaknesses of the global fiat currency system — such as the counterparty risks implicit in the UK example — and the very real problems it could cause.

But let’s not forget that these crises affect real people in their day-to-day, too. For ordinary British and Japanese citizens, who had to watch their savings and purchasing power plunge in value almost overnight, they must have been living nightmares.

Nations turn to Bitcoin amid crisis

Despite its relatively short history compared to fiat, Bitcoin has been embraced as an alternative to government-issued currency.

It is a lifeline for countries with persistent political and economic crises, such as El Salvador, Venezuela, and Iran.

For Venezuela and Iran, protracted hyperinflation drove citizens to abandon their failing national currencies for Bitcoin. And El Salvador, of course, is the first country to make Bitcoin legal tender in a bid to become independent from the US dollar, which was its dominant currency.

More recently, Ukrainians are turning to Bitcoin amid the ongoing Russo-Ukraine War. As long as their banking and financial ecosystem remain under siege by Russia, Ukrainians cannot depend on fiat currency and thus turn to crypto assets.

Today, people around the globe are experiencing disconcertingly rapid plunges in purchasing power, with inflation triggered by a seemingly endless string of factors including the war in Ukraine and government monetary policies. So, the question is: is it time for us to turn towards Bitcoin, too?

A recent report by asset manager Fidelity suggests that Bitcoin has several key advantages over fiat that are particularly relevant today. In “stark contrast” to fiat, Bitcoin "does not correspond to another person’s liability, has no counterparty risk, and has a supply schedule that cannot be changed,” concluded the report.

Meanwhile, industry insiders like Bitcoin strategist Greg Foss opined that Bitcoin could be a future "hedge to monetary inflation”, adding that there appear to be no other solutions.

He clarified, however, that Bitcoin fights monetary inflation (caused by manipulation of money supply) but not Consumer Price Index inflation (rising cost of living due to other factors).

Bitcoin reigns as the alternative to currency

Fiat currency has never looked as bad as it does today. The Russo-Ukraine War, as well as political upheaval in global leaders like the UK and the US, have truly exposed the cracks in a system that people have taken for granted for decades.

Amid global turmoil, it is increasingly difficult to trust central governments to protect citizens from serious problems like inflation and the erosion of our wealth.

Bitcoin appears increasingly attractive as a longer-term investment despite being an emerging asset class. New tokens are released according to a politically indifferent algorithmic logic, while the overall supply of Bitcoin is subject to a hard cap and cannot be manipulated by any authority.

Investors therefore think of Bitcoin as a future store of value and a safe haven amid inflation, akin to gold.

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