1. Research

Fiat, fifty and frail - Long-Term Asset Return Study 2021

Research Strategist
Macro Strategist
Henry Allen

Latest flagship annual report from Deutsche Bank Research questions whether fiat money will survive our investment horizons.

Last month effectively marked 50 years of the fiat regime. On August 15, 1971, President Nixon suspended the convertibility of dollars into gold and for all intents and purposes collapsed the 25-year-old Bretton Woods system. Given that most global currencies were fixed to the dollar at the time, this marked the end of a gold-based system.
The new Long-Term Asset Return Study 2021 “Fiat money, fifty and frail” highlights that the underlying money system has changed frequently over the past few hundred years - and just because the current framework is all that we know, doesn't necessarily mean it will carry on forever.
The research team behind the report, led by Head of Thematic and Credit Strategy Research Jim Reid, states that although gold-based money occasionally broke down for brief periods in the twentieth century, precious metals backed most global money throughout history prior to 1971. In the same way that few would question fiat money today, during the inter-war period last century, policymakers could not have conceived of an economy without the Gold Standard, despite it going through its most turbulent period in history.
“History suggests that precious metal systems see stable or very low inflation or deflation (which has often been their downfall), limited peacetime government debt increases, and short business cycles,” the report says, whereas “fiat money has generally seen much higher and at times extreme inflation, ever higher levels of debt, but longer manufactured business cycles.”
Reid highlights that none of the 152 economies the team analysed?? has seen average annual inflation below 2 percent in the 50-year fiat era since 1971. Only 45 of these have seen it average less than 5 percent over the period, with 55 seeing more than 10 percent. The last 50 years has seen worldwide inflation at its highest levels ever . Although inflation has been lower in the last decade or so, Reid explains that once inflation arrives in a fiat world you are highly unlikely to see enough subsequent disinflation to offset it.
“Gold money systems have had very strong, passionate advocates but also strong critics. It is interesting that you don't tend to see the same praise and passion for fiat money through history, possibly as it tends to arrive because other systems have failed, rather than because of a view that it is the best system,” Reid says.
“Interestingly, today crypto is starting to build up the strong passionate advocates that gold has had in the past. It also, however, attracts ridicule and disbelief. Whatever happens going forward, views, orthodoxy and money systems do change over time. Fiat money has only been the dominant framework for a small fraction of history and as such it shouldn't be too controversial to suggest it may not always be the system of choice. With endless structural deficits and extraordinary levels of money printing, we have certainly stressed its flexibility in recent years. Will there be a point when it breaks rather than bends?
The full report is available only to Deutsche Bank Research subscribers and can be accessed here.  If you are not a subscriber please contact your Deutsche Bank Sales representative.
For important disclosure information please see: https://research.db.com/Research/Disclosures/Disclaimer

© Copyright 2023. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, licensed to carry on banking business and to provide financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG, London Branch, a member of the London Stock Exchange, authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number 150018) and by the PRA. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Inc. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.