Limitations of Fiat

We are currently facing a crisis in the eastern hemisphere — The 2022 Russian Invasion of Ukraine. Many sanctions have been imposed on Russia. A huge chunk of its $630 billion worth of foreign reserves have been frozen. Major financial services such as Visa and Mastercard have suspended their operations in Russia. Global corporations, from Netflix to Nike, have been cracking down and leaving Russia.

Figure 1: U.S. Government Spending After Gold Standard

That said, even the de-facto leaders of the free world are suffering from their lavish monetary policies, with COVID-19 being a major trigger. While being the world’s reserve currency allowed the U.S. and other governments to respond with unprecedented speed to the ongoing pandemic, easy monetary policy and QE resulted in worldwide debt exploding with unprecedented pace. Huge budget deficits and uncontrollable money printing may result in the rest of the world losing confidence in the U.S. dollar, calling the currency supremacy into question.

In the inflation (CPI) report from March 2022, inflation stood at a 40 year high of 8.5%. Gas prices soared by 48% YoY. In contrast, wages growth has not been able to keep up with inflation. If the bubble in stock valuations pops, the $6 trillion shortfall in public and private pensions would worsen. After bailing out Wall Street through QE by printing more money, are we able to afford bailing them out once again? How will the rest of the world respond to seeing the reserve currency debased in such a swift and egregious manner?

Figure 2: Inflation Numbers