You’ve probably heard that U.S. inflation levels remain elevated. In August, the Consumer Price Index climbed 5.3% on a year-over-year basis.
While inflation in 2021 can be blamed on a variety of factors like supply chain bottlenecks and pent-up consumer demand to expansive Federal Reserve monetary policy, new research from Deutsche Bank highlights another simple reason.
The U.S. dollar is a fiat currency – which means it isn’t backed by a commodity like gold.
Throughout history, fiat currencies opened the door to faster inflation and rising debt, Deutsche Bank said.
“With structural government deficits, soaring debt, and money printing now seemingly essential for the global economy and markets to stay afloat over most of the business cycle, policy makers are increasingly putting stress on this monetary framework and shouldn’t take it for granted that fiat money will survive,” Deutsche Bank’s strategists said.
Sound dramatic? The source is reputable indeed. Deutsche Bank is one of the world’s leading financial service providers. Founded in 1870 in Berlin, today Deutsche Bank spans 58 countries and is one of the largest banks in the world by total assets.
Let’s look closer at the trends that are devaluing the U.S. dollar:
- Dollar devaluation
Inflation is rising. Not only in 2021 – but as a cumulative factor over decades.
For example, this inflation tool shows you that what cost you $100 in 1986 – costs you $238.45 today. The cumulative impact of inflation over the past 35 years reveals a decline in the purchasing power of the same $100.
Declining value of the U.S. Dollar. Another trend that impacts the value of your money is the actual value of the U.S. Dollar Index. Since January 1986, when the U.S. dollar index stood at 122.15 to 92.55 today (September 2021) – the value of the U.S. dollar index fell by 24%.
It’s a double whammy. Not only does rising inflation, or the higher cost of things you buy erode your purchasing power, but the value of the U.S. dollar itself is falling. That’s a bad combination.
Government debt. Then there is the ever-rising U.S. national debt – which stands at a record-high $28.7 trillion. While the government’s debt may seem far removed from your personal portfolio, if the nation’s debt load grows too large it could impact your daily financial life in a profound way.
The rising national debt creates large risks to not only our economy, but our stock market too. As our government issues more and more bonds to finance our debt, the supply of U.S. Treasury bond increases. It’s simple supply and demand, the more you have of anything, the less value it has.
At some point, foreigners may lose their appetite to continue buying our bonds to fund America’s spending spree, which could force interest rates to soar higher in the future to entice people to buy U.S. bonds. Higher interest rates typically send stock prices lower, sometimes crashing lower. It is a delicate house of cards. Once the house falls down, the shock waves could be strong.
The risks to fiat currencies are clear.
The case for diversification into tangible assets like gold are also clear.
Gold is no one’s liability (no government debt is attached to gold) and it carries no counterparty risk. Gold is accepted in every country around the world as a store of value. Holding gold as part of your portfolio is a proven diversifier, it provides competitive returns compared to other assets and offers downside protection.
Have you considered if you own enough today?
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