Long Term Fiat Has No Value: The USD Has Lost 95% of Its Purchasing Power Since the Federal Reserve Opened in 1913

January 2, 2020 / by Crypto.IQ

The USD is considered the most powerful currency in the world. Indeed, the USD is the world’s reserve currency, meaning that the USD is the most widely held currency by foreign Central Banks, to the tune of 61.74% of all foreign currency exchange reserves according to the International Monetary Fund (IMF). Compare this to the Euro (EUR) which accounts for 20.67% of foreign currency exchange reserves, and the Chinese Yuan (CNY) which only accounts for 1.89%.

Essentially, the USD is the rock upon which the world’s financial system is built upon, and most of the value of foreign fiat currencies is derived from the USD. However, the USD is more like sublimating dry ice than solid rock.

As detailed in a previous Crypto.IQ article, the USD is indeed the least inflationary out of the world’s major fiat currencies, but still has inflation of 2% per year. That may not sound like a big deal on a short term basis, and indeed most people and financial institutions do not give much thought to this 2% inflation rate.

However, at an inflation rate of 2%, in 10 years the USD loses 18.3% of its purchasing power, in 20 years the USD loses 33.3% of its purchasing power, in 35 years the USD loses just over half of its purchasing power, and in 100 years the USD loses 86.7% of its purchasing power.

Basically, long-term, the USD does not have any value, and it loses a majority of its value over the span of a human lifetime. The USD is the world’s least inflationary fiat currency, so other major and minor fiat currencies lose almost all of their value even faster. Also, these calculations assume that there will not be a hyperinflationary crisis, which may be a bad assumption since 24 countries are already experiencing or well on the way to hyperinflation, and from here on out excessive money printing is the only way for Central Banks to keep the economy afloat.

Indeed, the United States’ Central Bank, i.e. the Federal Reserve, is the culprit of the USD’s lack of value long term. As shown in this chart, since the Federal Reserve opened its doors in 1913 the USD has lost 95% of its value. Another chart shows that since World War 2, which is when the USD became the world’s reserve currency, the USD has been constantly inflationary.

This is unlike the past when the USD basically held its value and went through equal periods of inflation and deflation. Now deflation, i.e. the USD increasing in value, is not allowed. The theory is that deflation would cause investment and liquidity to dry up since people would save their money instead of investing.

Therefore, the Federal Reserve no longer allows deflation and has coordinated for decades to make the USD persistently lose value, in order to force people to invest instead of saving.

Now that decision is coming full circle, with investment drying up since the real economy is not producing enough of its own money to sustain enormous debt levels. This is perhaps due to the populace constantly losing money long term due to inflation, persistently reducing the ability of the population to buy things and start businesses.

This has forced the Federal Reserve to print $850 billion in the past half a year to prevent an economic collapse. There is no option besides continuing to print ever-larger amounts of money to sustain ever-larger amounts of debt, and the devaluation of the USD is now a forced decision and no longer a choice for the Federal Reserve.

Thus, the USD has no value long term, and anyone trying to save USD for retirement is playing a fool’s game. There is a solid alternative, however: Bitcoin (BTC). The value of Bitcoin (BTC) has risen from less than a penny to over $7,000 in only a decade, making it a strongly deflationary currency, i.e. a currency that is strongly gaining value. Therefore, Bitcoin (BTC) seems to be the best currency to save money in for the long term, especially compared to the USD and other fiat currencies which are worth nothing long term.