The Collapse of Money

What if the cost-of-living crisis was merely a blip in normality, with a far greater economic catastrophe, driven by collapsing fiat money systems, was about to hit us?

The cost-of-living crisis has been a major concern in New Zealand for the past year or so, with the main driver being inflation, which hit a 32-year high of 7.3% in June 2023. Grocery food prices went up 13.5% and interest rates up 29.8% for lowest-spending households. As a result, many New Zealanders are struggling to make ends meet due to the rising cost of living. This is leading to increased financial stress and hardship.

Currently, there are major concerns about the stability of the global financial system, with factors like rising inflation, high debt levels, and geopolitical tensions playing a role. Excessive money printing by central banks is also a point of criticism for some economists, who argue it contributes to inflation and asset bubbles.

Fiat currencies, which are not backed by physical assets like gold, are inherently vulnerable to inflation and government mismanagement. In extreme scenarios, hyperinflation or currency collapse can occur, with many historical examples available.

The Weimer Republic’s hyperinflation crisis between 1922 and 1923 was a period of economic disaster in Germany, when the value of the German mark plummeted and prices soared, having devastating effects on the German society and politics. It impoverished millions of people, eroded the trust in democracy, and fuelled the rise of the Nazis.

One of the most iconic images of this crisis is a boy pushing a wheelbarrow full of banknotes, which illustrates how worthless the currency had become. A wheelbarrow full of money could not buy a newspaper, a loaf of bread, or a cup of coffee.

With this in mind, it serves us well to remember that most modern paper currencies, including the New Zealand dollar, the US dollar, the Euro, and other major global currencies, are fiat currencies, and in some quarters there is a belief that the current fiat money system is unsustainable and prone to collapse, which would create more inflation.

With inflationary pressures easing and the attempts by central banks to curb inflation through interest rate hikes succeeding, prices could be under control. However, the issues in the Red Sea are initiating supply chain disruptions, and the ongoing war in Ukraine and other major conflicts in the Middle East, will have a significant impact on energy and food prices.

Critics argue that fiat systems are intrinsically prone to inflation due to the ability of governments and central banks to increase the money supply without a real asset backing, and if inflation returns unchecked, our faith in a government's ability to manage its economy falters. At that stage, a rapid devaluation of currencies could occur, triggering a wider economic collapse.

The global financial system has shown a tendency towards boom-and-bust cycles throughout history. Underlying issues like high debt levels and wealth inequality could exacerbate any new crisis.

The United States has a $34 trillion debt bomb growing bigger by the day. Currently US borrowing stands at 120% of its GDP. By 2035 this number is set to hit 130%. Many countries have bought US government bonds, and their exposure is around $7.6 trillion, so, this is risky both for America and the rest of the world.

According to the latest data from the Treasury of New Zealand, the total value of US government bonds held by New Zealand as of 30 June 2023 was $1.9 billion NZD. This represents about 2.4% of New Zealand’s total foreign currency reserves.

A default on U.S. debt could have severe and lasting consequences for the global economy, including a recession, leading to higher unemployment, lower income, and reduced consumer spending both in America and here in New Zealand. A crisis in the financial markets, as investors lose confidence, could trigger a sell-off of assets, a spike in interest rates, a collapse of credit, and a flight to safe havens like gold or cryptocurrencies.

 A disruption of the global supply chains would affect the prices and availability of goods and services across the world, especially in countries like New Zealand that rely on the U.S. dollar as an alternative to their own unstable currencies.

If central banks and governments failed to adapt to the changing financial landscape and lost their ability to control and influence the money supply, a digital currency could replace fiat currencies as the dominant form of money, rendering the previously mentioned currencies obsolete and worthless.

A severe global recession triggered by the crisis would significantly reduce demand for New Zealand's exports, particularly agricultural products, and tourism. This could lead to job losses, business closures, and a decline in living standards.

If the crisis triggers financial instability in other major economies, it could spill over to New Zealand through reduced foreign investment, bank lending, and trade financing. This could further exacerbate the economic downturn.

New Zealand is a highly trade-dependent nation, with exports accounting for around 30% of GDP. A decline in global trade would therefore have a significant impact. With our relatively high level of foreign debt, this would make us vulnerable to changes in global interest rates and investor confidence.

While New Zealand's banking system is considered robust, a global financial crisis could still put pressure on domestic banks and lending. The New Zealand government could implement fiscal and monetary measures to stimulate the economy and support vulnerable sectors, and with our strong democratic institutions and social safety nets, this could soften the blow of the crisis.

New Zealand's geographic isolation could provide some degree of insulation from the worst effects of the global crisis, and it's difficult to predict the precise effects of such a complex event. However, a global economic catastrophe driven by collapsing fiat money systems would have a significant negative impact on New Zealand, potentially leading to a prolonged period of economic decline with rising unemployment and falling GDP. This would lead to increased pressure on banks, businesses, and households due to rising interest rates and reduced access to credit.

As seen during the pandemic, a decline in exports and imports due to reduced global demand and disrupted supply chains would have a substantial impact. The potential for increased tensions and social unrest as economic hardship worsens would be of concern.

This scenario may just be the musings (some would say ravings) of this writer, but businesses and individuals should be prepared to adapt and implement measures to mitigate the negative effects of such a crisis.