Why currency debasement matters

Currency debasement refers to the deliberate reduction in the value or purity of a country’s currency, often through actions taken by the government or central bank. This can happen in various ways, such as increasing the money supply, printing more money, or lowering interest rates. The result is a decrease in the purchasing power of the currency, leading to inflation and higher prices for goods and services.

Since 2008, there have been concerns about currency debasement in the aftermath of the global financial crisis. Here are some factors and mechanisms that have contributed to this perception:

Quantitative Easing (QE): In response to the 2008 financial crisis, many central banks, including the Federal Reserve, European Central Bank, and Bank of Japan, implemented large-scale asset purchase programs known as quantitative easing. This involved buying financial assets such as government bonds to increase the money supply and stimulate economic activity. While QE helped stabilize the financial system, critics argue that it also risked debasing currencies by flooding the market with money.

Low Interest Rates: Central banks around the world have kept interest rates at historically low levels since the financial crisis to encourage borrowing, spending, and investment. While low interest rates can stimulate economic growth, they may also contribute to currency debasement as investors seek higher returns in other assets, leading to capital flows and potential depreciation of the currency.

Government Debt: Many countries increased their government debt levels significantly to fund stimulus programs and bailouts during and after the financial crisis. High levels of debt can create pressure on governments to pursue policies that may indirectly contribute to currency debasement, such as inflationary measures.

Global Economic Imbalances: Trade imbalances and competitive devaluations can also contribute to currency debasement. In an effort to boost exports, some countries may engage in currency devaluation, making their goods and services more competitive on the international market. This can lead to a race to the bottom, where multiple countries engage in devaluation strategies, potentially resulting in a loss of confidence in fiat currencies.

Unconventional Monetary Policies: Central banks have explored unconventional monetary policies, such as negative interest rates, to stimulate economic activity. These measures can impact currency values and contribute to concerns about debasement.