Deutsche Bank sees fiat currencies failing, as citizens demand alternatives

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Updated: 10 December 2019

Banks traditionally rely upon long-term planning, which usually means polishing up the crystal ball for a look see into the next decade as to what could evolve. The first major global bank to share its thoughts of how 2020 might proceed to 2030 is Germany’s own Deutsche Bank. The picture they paint is not a pretty one. Policymakers will be caught between rising debt loads, inflation, and, yes, rising interest rates, too. The inevitable consequences will be the continued weakening of our fiat currencies across the globe.

The strains over the next decade cannot be avoided. Fiat currencies will be put to the test. Deutsche Bank (DB) then asks the ultimate question: “Can fiat currencies survive?” DB’s chief strategist, Jim Reid, is definitely troubled: “The forces that have held the current fiat system together now look fragile, and they could unravel in the 2020s.” Reid authored the report, which evaluated “24 alternative ideas for the next 10 years”.

Reid then delivers the foregone conclusion: “If so, that will start to lead to a backlash against fiat money and demand for alternative currencies, such as gold or crypto could soar. The demand for alternative currencies will therefore likely be significantly higher by the time 2030 rolls around. Will fiat currencies survive the policy dilemma that authorities will experience as they try to balance higher yields with record levels of debt? That’s the multi-trillion dollar (or bitcoin) question for the decade ahead.”

Ten years ago, Deutsche Bank’s share price was roughly $72. It is now $7.21, a fall in value of 90% at the same time that Bitcoin was born. This experience has given the bank first-hand knowledge of devaluation forces. The report follows with this chart:

The bank’s analysts firmly believe and project that “corporate and government backed cryptocurrencies will drive crypto adoption” over the next decade. Reid predicts: “Assuming governments back cryptocurrencies, and consumers want them, adoption rates will drive the timeline for mainstream use. If current trends continue, there could be 200 million blockchain wallet users in 2030.”

Are the analysts at DB just painting a “worst case” scenario, or do we have a real life example to draw similar inferences from? The answer is yes. Japan has dealing with these issues for nearly three decades. An article in Seeking Alpha noted that: “Japan, with the world's oldest population – and not coincidentally the most indebted government relative to GDP – is leading the stampede towards the cliff.” The combination of soaring social costs, debt, and inflation will someday meet rising interest rate costs.

The article concludes: “A time is coming when Japan will feel pressure – either from rising inflation or a weakening currency or both – to let interest rates move back to historically normal levels. But this will blow up the budget, making higher rates politically and financially impossible. The result: a currency death spiral in which the yen plummets while the government continues to create new credit, with no end in sight. And a perfect illustration of where the rest of us are headed.” The article appeared in June of 2018.

Deutsche Bank is not the only one conducting long-term planning in Europe. Denmark’s Saxo Bank also released a similar report. Chief economist Steen Jakobsen wrote: “We see 2020 as a year where at nearly every turn, disruption of the status quo is an overriding theme. The year could represent one big pendulum swing to opposites in politics, monetary and fiscal policy and, not least, the environment. In policy making, it could mean that central banks step aside and maybe even slightly normalize rates, while governments step into the breach with infrastructure and climate policy-linked spending.”

If anyone is still wondering where the impetus will arise that will propel Bitcoin after its halving event to new All-Time Highs, one need look no further than the conundrum created by our friendly central bankers. A downturn in the current economic cycle is inevitable, and when it occurs, the scenarios outlined by both Deutsche Bank and Saxo Bank will take center stage.

The primary reason Bitcoin was created was to offer an alternative to these unavoidable fiat currency trends. Take note and prepare accordingly.