Fiat money - it's losing value everywhere

"An abrupt devaluation would be a problem for Argentina, said the country's President Fernandez in July. Obviously he doesn't talk to Argentina's central bank governor, Miguel Pesce, who has just devalued the Argentine Peso by 18%, taking it to 350 to $1. The widely-used black market exchange rate is around 670/$1. Almost 13,500 kilometres away, in Moscow, the Russian currency has just dropped to its lowest in 17 months; the Rouble traded at 101 to $1 but has recovered slightly. It's lost 25% of its value since the invasion of Ukraine. Both countries have pushed interest rates up - Russia to 12%, Argentina to 118% (!) - in an attempt to bolster their respective currencies.

Partly the problems of both countries are political - Russia's President Putin is seen by the West as waging a war not just on Ukraine but on values espoused by the West, and Javier Miele, variously described as a 'radical libertarian' and a 'phenomenon', has just won the biggest share of the vote in Argentina's presidential primary elections. Miele scares conventional investors, promising that if he becomes President in October's election he will "blow up" the political status quo and "burn down" the central bank. Two of Argentina's most liquid US Dollar bonds fell on the surprise news of Miele's electoral success.

Argentina's and Russia's problems are not ours. Dollars, Pounds and Euros are strong currencies - right? They may be stronger than Roubles or Pesos, but they too have lost purchasing power and will continue to do so thanks to the scarcely hidden impact of inflation.

Inflation destroys value

Consumer prices in the US went up by 7% in 2021 and a further 6.5% in 2022. In the Eurozone inflation was an average in 2021 of 2.45% and 8.4% in 2022. The UK's inflation rate in 2021 was 2.52% and the following year 7.92%. Of course these figures are very broad brush. Food price rises in the US between 2021 and 2022 were about 11%, and in the UK were up by 16.5% year-on-year in June this year. Individual countries within the Eurozone have had much higher inflation than the average; prices went up in Lithuania by 20% in 2022. Argentina's inflation rate is now more than 100%, the worst for 30 years. Little wonder that Miele has promised electors that he will 'dollarize' the economy - Argentines have already done that and use the US Dollar at every possible opportunity.

Rising consumer prices - inflation - cut the amount of goods or services you can purchase with your money. There are losers and winners in inflation. Losers are those who save, or are retired and live on fixed incomes, borrowers on variable rates. Winners are those who owe debts on a fixed repayment basis, owners of physical assets such as land, or companies that can resist demands for higher wages from their employees.

A multi-polar world and currency to match

Next week sees a summit in Cape Town of the BRICS bloc, Brazil, Russia, India, China and South Africa. The bloc earlier this year was reported as preparing to launch at this summit a new bloc-wide currency which would replace the US Dollar 's dominance of global trade. The idea the BRICS bloc might develop its own currency is "just ridiculous" says Jim O'Neill, the former Goldman Sachs economist, the man who invented the term BRICS in a 2001 research paper for his bank.

Yet the Dollar is clearly slipping in international esteem. The International Monetary Fund (IMF) says that in 1999 the US Dollar amounted to more than 70% of central banks' foreign exchange reserves; last year the figure was about 60%. What might be ridiculous now may well start to make sense soon; particularly if (as seems inevitable) central banks start to impose Central Bank Digital Currencies (CBDCs). Just as one fiat currency has become dominant, the various CBDCs will converge on a single CBDC to be used in global trade.

The central banks of the US, UK and the Eurozone are determined to wrestle down inflation to a target of 2%/year. That's proving extremely difficult, despite the rise in interest rates. The inflation of the past two years has already reduced the Dollar's, Pound's and Euro's purchasing power. Meanwhile the gold price has continued to reward those who own it - it has gained more than 7% so far this year (up to the end of July) on an average of 9 major currencies. Wherever you live, be it London, Buenos Aires, Moscow or San Francisco, inflation will continue to take chunks out of your wallet.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.