Deutsche Bank Strategist Jim Reid suspects that global demographics and other realities may be soon putting the current fiat-money regime to the test. According to Business Insider:
Reid's basic contention is this: 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," and an offsetting disinflationary shock that kept it afloat since 1980 is now slowly reversing.
If that's the case, Reid says the fiat currency system — a term which describes any currency whose value is backed by the government that issued it, rather than by a commodity like gold or silver — could be "seriously tested" over the next decade.
But why now?
According to Reid, since the 1970s, many world economies have benefited significantly from a number of deflationary forces. Chief in Reid's mind is "an explosion in the global working-age population" which has led to declines in wages and an ability to produce immense amounts of goods and services at low prices.
(Other deflationary forces, which aren't mentioned in the BI piece, include the technological gains that Alan Greenspan was always so fond on mentioning when he spoke publicly. It's true that labor has increased, but so has the usefulness of capital in making less-expensive goods.)
Reid terms the large growth in the global labor force as a "demographic super cycle" and that any reversal in the cycle "could spell problems for the fiat currency system."
The reason?
Well, thanks to these deflationary forces, central banks "can respond with familiar tools: More leverage, loose policy, and extensive money-printing."
Thanks to so many factors that are pushing prices downward, central banks can massively expand the money supply and still maintain some semblance of price stability.
Buried in this explanation, of course, is what Austrians have long pointed out about prices: In a modern economy, the natural thing for prices to do is go down. Contrary to the deflation-phobia exhibited by so many economists today, falling prices are a signal of improvements in capital, and possibly of greater access to capital by workers. Neither of these things are a danger to an economy.
Thus, as Reid notes, without so much central-bank money printing, global prices would likely have been declining for the past two or three decades, just as they did during much of the late 19th century in the US when living standards were increasing substantially.
So, while central bank money printers think everything's fine because their price indices show "low" inflation, it is likely that the real cost of money printing has been a beneficial lack of deflation.
In other words, consumers could have benefited from repeated drops in the cost of living in recent decades. But instead, they get mild inflation which robs them of the cheaper goods that would have existed in the absence of central bank meddling. Fortunately for central banks, though, few voters and consumers view things that way, and instead have bought the idea that prices are naturally flat, and thus, an inflation rate of, say, two percent is no big deal.
In reality, voters and consumers should be comparing an inflation rate of 2 percent, not to 0% but to, say, negative 2%. In this scenario, central bank inflation should be viewed not as 2 percent, but as 4 percent. Every year. Compounding.
Reid is now worried that these deflationary factors may be coming to an end, and once it does, central banks won't be able to use their usual tricks. And if that happens, the age of fiat money will be in trouble.
