Home Cryptocurrency Non-Inflationary Currencies And Their Economic Impact

Non-Inflationary Currencies And Their Economic Impact

by Pragati Shrivastava
, Non-Inflationary Currencies And Their Economic Impact

The core inflation rate in the U.S. is 1.9% and its rising every month. The inflation rate responds to each phase of the business cycle – Expansion, Peak and Recession. Inflation rates play a key role in determining the health of the economy and even moderate inflation can rapidly erode purchasing power and create uncertainty as businesses have more difficulty estimating future costs. Would eliminating inflation be reasonable, and do non-inflationary currencies, backed by gold or other commodity reserves, stand a chance against them?

Some experts say yes. Reducing inflation to zero would incur temporary costs and gradually, as the rate of change in the general price level slowed, the economy would adjust. The cost of the move could easily outweigh the benefits. The case for a non-inflationary currency is weak, but with alarms going off surrounding a potential collapse of the dollar, some experts are considering turning to cryptocurrencies to overcome inflation. Their argument is based on the fact that fiat currencies are paper money with no intrinsic value, unlike gold and silver.

Remember, the USD uncoupled with gold in 1971 and the paper bill’s denominated value is no longer backed by a physical commodity. Instead, its value is determined by supply and demand, backed by our trust in the issuing authority’s ability to keep the interest rates low. The use of paper money enables the government to finance the budget deficit by printing money, which also causes hyperinflation.

Inflation causes turmoil in the economy and people lose faith in their government. The government tries to regulate inflation by cutting interest rates and infusing capital in the economy. Countries like Venezuela are still coping with one of the worst cases of hyperinflation since the Weimar Republic. While traditional cryptocurrencies gained popularity in 2017, commodity-based stablecoins, though not mainstream, presented a good case for near-zero inflationary currencies.

The limited supply of commodities comes from their natural scarcity (e.g. gold, diamonds, platinum) or from production and trade agreements. For a commodity to be of interest as collateral or a backing asset of another financial instrument, it is traded in the markets. Continuous trading of an asset allows for the price to be stable and controlled by market liquidity. The scarcity and limited supply of exchange-traded commodities are why it is thought that their value cannot drop to zero.

While the price may fluctuate by a small percentage depending on market demand and offer, production or industrial usage, it is really hard to imagine a situation in the foreseeable future when, as an example, the value of gold or platinum drops to zero. It is nearly impossible for a commodity-backed stablecoin to replace fiat currencies. The rate at which the commodity is introduced in the market would not be able to support global commerce at this time.

While current political and economic conditions call for lower inflation rates, non-inflationary currencies have their drawbacks and present a weak alternative to the problem and therefore non-inflationary currencies may indeed have their place in the economy, but they are hardly likely to replace fiat currencies any time soon.

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