A top Deutsche Bank strategist speculates that we may be looking at the “start of the end of fiat money”.
Bitcoin was originally developed as a peer-to-peer electronic cash system that would free its users from the bondage of state-controlled currency and the erosion of wealth due to inflation. Despite its phenomenal growth, most mainstream financial analysts remain skeptical that it will ever achieve mainstream adoption – at least as a currency used for everyday transactions.
However, as Business Insider reports, Deutsche Bank strategist Jim Reid envisions that the current fiat monetary system could begin to collapse within the next decade, creating a climate that would encourage the rise of an alternative currency system.
Reid made this shocking claim in a recently-released research paper, and he argues that the current fiat monetary system – which began in 1971 when U.S. President Richard Nixon decoupled the dollar from gold — is “inherently unstable and prone to high inflation”. The corrosive effects of inflation have largely been masked in major economic markets, primarily due to the meteoric growth of China’s economy and the global working-age population. He says that these factors created a situation in which central banks could control inflation externally and prevent wages from increasing too rapidly.
“It’s not usually this easy as inflation would have normally increased with such stimulus and credit creation,” Reid writes. In fact, “it could be argued that this external disinflation shock has perhaps ‘saved’ fiat currencies.”
If this demographic and developmental cycle slows or reverses, it “could spell problems for the fiat currency system,” he continues, “which could herald in the beginning of the end of the global fiat currency system”.
Opportunity for Alternative Currencies
Reid anticipates that central banks may seriously consider a shift to a commodity-backed monetary system within the next decade, vindicating the gold bugs who have been marginalized and ridiculed by mainstream financiers.
However, the economy looks quite different than it did in 1971, and many bitcoin advocates believe that the emergence of the digital age necessitates a digital currency. Acknowledging this, Reid says it is possible that cryptocurrency or another alternative medium of exchange could eventually supplant paper money, although he stops far short of predicting that this new system will be based on bitcoin.
“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,” Reid concludes.