by Daniel Lacalle at Daniel Lacalle
The U.S. dollar enjoys the world reserve currency status due to numerous factors. Legal and investor security, an open and transparent market, as well as independent institutions with checks and balances that limit political power and strengthen the country’s currency in relative terms. No, a country does not have a world reserve currency due to military power. No one accepted the kopek when the Soviet Union ruled half the world. For a fiat currency to be a world reserve it needs to be widely accepted as unit of measure, method of payment and reserve of value.
The problem is that all the above may be under threat.
Increasing pressure from politicians is threatening the reserve of value status of fiat currencies, and the political threat is not only against monetary authorities, but aimed at all institutions that provide independent checks and balances that limit political imposition.
When politicians talk about the “social use” of money, what they are basically saying you will suffer higher inflation for longer. It means using the currency to disguise massive fiscal imbalances under the illusion that citizens will always have to use the local currency. It makes no sense. A fiat currency, like any other good or service, is subject to supply and demand. Excessive supply is damaging its purchasing power the same way that excessive supply lowers the price of a good, but weakening demand added to rising supply leads to the collapse of the currency.
The moment that politicians stop defending the reserve of value status of their currency they are destroying the country they promise to defend.
Destroying the currency is the first sign of the decline of a nation…
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