Deutsche Bank predicts end of fiat money?

The forces that hold the current money system together are fragile and could collapse in the next decade. That's according to Deutsche Bank analyst Jim Reid in a new report called 'Imagine 2030'. He expects that in a new crisis, people will turn to alternatives such as gold and virtual currencies. The huge debts will make it more difficult for governments and central banks to keep the current money system afloat, Reid said.

He expects governments to put pressure on central banks to continue with stimulative policies for longer. This will put further pressure on the independence of central banks and their commitment to price stability. Governments will be inclined to spend more money for political gain, causing inflation to rise. This will be reinforced by central banks, which will buy more debt to keep interest rates low. From the report:

"So what will happen to the global monetary system if the 40-year trend in labor costs reverses? If central banks maintain their current mandate to keep inflation around two percent, they will be obliged to tighten their policy more often. Regardless of external factors.

Such an outcome is likely to be unrealistic, given the amount of debt there is at the global level. Governments will absolutely change the mandate of central banks first to allow for higher inflation or reduce central bank independence. This is to prevent Interest rates are rising and the debt burden is becoming problematic."

More inflation and negative interest rates

The combination of rising inflation and low or even negative interest rates results in negative real returns. In this scenario, savings and government bonds become less attractive, which means that savers and investors will turn to alternatives. The Deutsche Bank analyst wonders whether our current monetary system is designed for this.

"Ultimately, it is possible that inflation will become more and more embedded in our system and that doubts will arise about the sustainability of fiat money. Demand for alternative currencies is therefore likely to be significant by 2030.

Will fiat money survive the policy dilemma that authorities face as they try to balance higher interest rates with record debt? That's the multi-million dollar (or bitcoin) question for the next decade."

Deutsche Bank's report is full of interesting analyses, for example on the end of cash, extremely high sovereign debt and the role of virtual currencies. The full report is available at here to find.

No one knows what our money system will look like in the future, but there is a good chance that people will look for alternatives. Especially with a negative interest rate on savings. Consider, for example, Buy gold as an alternative to your savings at the bank and as diversification within your investment portfolio.

This contribution was made from Geotrendlines