Edmund Conway has written an interesting article about the future for fiat currencies.
He points out that tomorrow it will be 40 years ago that the Gold Standard was abolished (and fiat currencies introduced). He then asks:
So are we nearing the end of this economic era? All the hallmarks are there. We’ve been through the periods of faith in the system, peaking with the certain belief in the 1990s and early 2000s that inflation targets really would help keep governments on an even keel. We’ve had the financial crisis that usually marks the beginning of the end of established monetary systems. And now we are seeing the debasement.
Consider the price of gold, which has recently scaled new highs. [...] The price reflects many factors, including economic growth, but chief among them is a diminishing faith in the ability of fiat currencies to maintain their value.
[...] It is no coincidence that the price really started to spike (in other words faith in currencies versus gold plunged) in 2001, which just so happens to be the year central banks first started experimenting with quantitative easing (QE) – in Japan.
As ever these days, any hope, such as it is, lies in China. It is fast realising that its investment in US debt will not be fully repaid.
However, in the long run it has two options: to allow the US to debase or default; or to negotiate, forgive a chunk of the debt and dramatically reduce those imbalances. It can afford to do so economically; whether it can afford it politically is another question. However, such a bold move (and I do not expect it any time soon) would at least mark a fitting gesture from an economy which will help construct the next international monetary system.
What would the next international monetary system be like? Would we see a return to the Gold Standard, a move which Conway has previously dismissed as madness? (The latter article is also the source of the illustration above, which illustrates that the Gold Standard implies the abolishment of independent monetary policy, whereas we’ve sacrificed fixed exchange rates instead for the past four decades.)
I’m not sure what we’ll see. However, very few countries have had truly free-floating currencies for the past decades, so I’m not sure sacrificing independent monetary policy will be seen as a big problem to most countries, although it of course will have major implications for the US and the UK.