Is the currency crisis really happening?

We are going through some unprecedented economic times where we have seen a manufacturing slowdown, business closures, and an unemployment crisis.  Along with these, another problem that hasn’t been seen in the last 100 years is fast approaching us—something which has caused the depression of some dominant economies in history.

Today, if we want to buy something like bread, what would we do? Well, we would probably just go to our local grocery store, pick out some bread, and pay with our card or cash. But buying bread wasn’t always this simple. A few thousand years ago, if we wanted to buy something like grain, we would have to give up something in return like sheep. This was called the barter system, and this is how humans traded goods before the invention of currency. But this led to a deep economic ineffectiveness. What if the person with grain did not want a sheep? Even though to most people, the grain and sheep have equal value, but if the grain owner did not wish to trade a sheep, then the trade would not happen. Therefore ancient societies in Egypt, Babylon, India, and China came up with an innovative idea to solve problems like these that the world continues to use today. They began using clay tokens that could be exchanged at local warehouses for a select quantity of items. Meaning that these clay tokens had the value that could be traded at markets instead of having to use the barter system. This was the invention of modern-day currency. But with the invention of currency came additional setbacks. The Roman Empire in the 3rd century AD had the world’s most state-of-the-art banking system that depended heavily upon its currency and coinage. But then a familiar series of events led to the destruction of its financial system. The first of which was that the Mediterranean began running out of silver, which was an essential resource to the Roman economy, and was what Roman currency was dependant upon. The Second was the economic growth of the empire had slowed down for several decades. And Third was that the empire began manufacturing more coins, and making more of its own currency, to try and help with its state finances. The trouble was that once they started overproducing coins; they devalued their own money. So, by around 284 AD, the Roman empire was going through the first episode of what we know today as hyperinflation. This hyperinflation caused a striking decrease in the value of the Roman currency, it increased the price of all goods within the Roman empire on nearly a daily basis, and also brought much of the middle class into poverty. This hyperinflation, economic decline and several wars became known as the crisis of the third century, which many historians view as the beginning of the fall of the Roman empire.

Now, remember, the overproduction of Roman currency to combat state spending was one of the most significant contributors why the empire fell, and it is like the situation today. We are facing a crisis in which governments around the world are printing trillions of dollars to help combat the effects of the lockdowns. Now many people have feared that this overproduction of currency will lead to high inflation or even hyperinflation, which would likely catapult the middle class of many countries around the world into poverty. However, although most countries across the globe are overprinting their own currency, we have seen no inflation at all… as of right now. In the early 1930s, during the worst parts of the great depression, most people would have expected to see some high inflation or hyperinflation, which is what typically occurs during bad economic times. But what we saw was the exact opposite. During the great depression, we saw an example of what we call deflation. The great depression caused such a bad economic crisis that the demand for cash dramatically exceeded the government’s ability to increase the money supply. So, what we saw is the value of the currency of the United States increased by 10% per year for three years thanks to this deflation. Now, this might sound great. I mean, the buying power of your money increases during deflation, so how can this be a dangerous thing. Deflation increases the value of everything around the currency. As I already mentioned that the positives that the current money in the economy has more buying power, but it also increases the actual value of debt. Debt is at an all-time high for businesses, individuals and governments around the world. The governments have already taken more than $16 trillion of debt in the last three months alone and adding to the debt pile, which is 10 times higher than the normal. What this means is anyone with debt, whether it is the government are at risk of defaulting on their loans, businesses are months away from not being able to make payments, individuals are behind their credit cards, mortgages and student loans, they will have higher debt burden thanks to deflation.

So we are living in a world where debt is at an all-time high, and it is being amplified by deflation which started a couple of months ago. For example, significant economies in the United States, the European Union and the UK might enter deflation in the next 3-4 weeks. Countries like China and Brazil might come deflation within the next couple of months, and nations like Canada, Japan and South Korea have already entered a state of deflation. This might be bad for Japan and Canada. Japan is already the most indebted nation in the world in relation to its GDP and Ontario, which is the largest province in Canada, is the largest sub-sovereign debtor in the world. In fact, if Ontario were a country, it would have ranked 28th largest debtor in the world ahead of countries like Ireland, Saudi Arabia, Argentina, South Africa and the United Arab Emirates. What this means is that places which already have a high debt burden and go through significant deflation are also at risk of a very rare economic crisis called the deflationary spiral. So remember when I earlier said that the Great depression had 3 years of deflation. Well, deflationary spiral occurred during that time, and here’s what happened.

Remember, Today is the tomorrow you are worried about yesterday.                                                            -Dale Carnegie

Deflation caused the price of goods to fall. Cost of goods dropped meant businesses made less money. Companies making less money caused mass layoffs and decreased wages. This causes less spending, and therefore businesses make less money, and that causes more layoffs and so on. This cycle continued until the global economy entered its worst point in history in the mid-1930s. So the deflationary spiral of the great depression ended up deepening and speeding up the adverse economic effects of the great depression. That is what might happen during this crisis. The deflation rate is okay and won’t cause a deflationary spiral immediately, however, deflation has been accumulating for several months now. So, it might be possible that if deflation were to continue to increase for the next 3-6 months, we might see some countries going through deflationary spiral which we haven’t seen since the great depression. But even though many people think inflation as an enemy to the economy, a much less common enemy of the economy is on the horizon, yet no one talking about this. So if deflation continued to increase, we would likely see a much worse economic crisis than what we are experiencing right now. This is especially true for those countries with high debt burdens. So what do you think about all this? Let me know in the comments.

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