When Fiat Currency Stops Being Money

By Daniel Lacalle

Most emerging and developed market currencies have devalued significantly relative to the United States dollar in 2021 despite the Federal Reserve’s aggressive monetary policy. Furthermore, emerging economies that have benefitted from rising commodity prices have also seen their currencies weaken despite strong exports. As such, inflation in developing economies is much higher than the already elevated figures posted in the United States and the eurozone.

Greek Currency burning

The main reason behind this is a global currency debasement problem that is making citizens poorer.

Most central banks globally are implementing the same expansionary policies of the European Central Bank and the Federal Reserve System but the results are disproportionately hurting the poor as inflation rises, particularly in essential goods and services, while fiscal and monetary imbalances are increasing.

Many emerging economies have implemented a very dangerous policy of boosting twin deficits—fiscal and trade deficits—under the misguided idea that it will accelerate growth. Now growth and recovery estimates are coming down but monetary imbalances remain.

Therefore, most currencies are falling relative to the US dollar. The policies implemented by global central banks are as aggressive or even more so than those of the Federal Reserve but without the global demand that the US dollar enjoys. If global nations with sovereign currencies continue to play this dangerous game, local and international demand for their currency will evaporate and dependence on the US dollar will rise. More importantly, if the Federal Reserve continues to put its global reserve status to the test, all fiat currencies may suffer a loss of confidence and a move to other alternatives.

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