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Last word

Taking stock of the paradigm shifts occurring at breakneck speed

If something cannot go on forever…

_{Whether we like it or not, we are living in a time of sweeping, fundamental change. Paradigm shifts are occurring at breakneck speed across the political, economic, financial, technological and geopolitical realms. We are moving from a largely unipolar world order to a multipolar one.}

_{As part of this shift, war is on the rise while the incumbent world reserve currency, the US dollar, is in decline. At the same time, the world is going through an energy transition that threatens to transform energy markets, infrastructure and technology beyond recognition. That’s not to mention all the changes, good and bad, that artificial intelligence is likely to bring in its wake.}

_{Underpinning many of these shifts is arguably the most important change of all, and one that doesn’t attract nearly the attention it deserves: the end of the 80-year debt cycle. If history has taught us anything, it is that no reserve currency system lasts forever – indeed, many of them have lasted less than 100 years.}

_{Before the US dollar was crowned as global reserve currency at the 1944 Bretton Woods conference, it was the British pound that reigned supreme. For decades, the British managed their currency well, but that all began to change during the First World War (1914-18). To fund its war economy, Britain accumulated vast sums of debt, leading to inflationary pressures. In an attempt to}_{maintain the gold standard, the government continued to borrow extensively.}

_{However, by 1931, the strain of debt and the need to finance government spending forced Britain to abandon the gold standard, effectively debasing the pound.}

_{By the end of World War II, Britain’s economy was in long-term decline and the British pound had lost its reserve status.}

_{Much the same happened to the long succession of de facto reserve currencies that preceded the British pound, from the Portuguese cruzado to the Spanish dollar, to the Dutch guilder. They have come and gone, consigned to history books and gradually forgotten by the global public. In each case, a long period of stability was followed by excessive accumulation of debt, gradual}_{debasement of the currency and surging inflation, and finally, inevitably, replacement by some other reserve currency or system of money.}

…it will stop

_{The US dollar is on the exact same trajectory. The US emerged as the global superpower after World War II. At the 1944 Bretton Woods conference, the US dollar was pegged to gold and crowned as the apex currency of the new post-war era. For roughly two decades, the US enjoyed unparalleled economic growth before falling into the same trap as all the other empires that had preceded it.}

_{In the 1960s, US government spending ballooned in order to finance the Vietnam War and the Great Society welfare programs. By the early ‘70s, the US faced mounting inflation and a growing trade deficit. President Richard Nixon’s response, in 1971, was to suspend the dollar’s convertibility into gold.}

_{This last-ditch measure debased the US dollar, causing inflation and reducing its purchasing power throughout the 1970s. It was a default in all but name, out of which the current fiat currency age was born.}

_{With nothing backing the USD, or for that matter any of the world’s floating fiat currencies, there was no limit to how much money could be printed. Since the 2008 financial crisis, the printers have gone into overdrive. The US Federal Reserve and other Western central banks have resorted to round after round of quantitative easing (money printing) to stimulate the economy, further debasing their currencies. Inflated to unprecedented levels after the mega fiscal bailouts adopted during the pandemic, global public debt will soon break through the 100%-of-GDP barrier.}

_{Dollar decline is an undeniable reality. The US dollar is still far and away the most dominant global reserve currency, out of the many reserve currencies held by central banks, but its share has been eroding for years, as central banks have diversified to other reserve currencies, as well as increasingly to gold.}

_{The word ‘dedollarisation’ is now part of the global lexicon thanks largely to the constant debasement and recent weaponisation of the dollar. Many countries in the Global South are looking for alternative ways of financing trade and accumulating central bank reserves.}

_{Gold is back in fashion, recently surpassing the euro to become the second largest reserve asset for central banks, while bitcoin, the hardest money of all, goes from strength to strength. Meanwhile, the global banking system is still dangerously fragile and US public debt, now at 124% of GDP, is growing so fast that even the International Monetary Fund is raising the alarm.}

_{“This cannot go on forever," warned the IMF's economist, Vitor Gaspar, at the annual meeting of the IMF and the World Bank in Washington in October.}

_{As the US economist Herbert Stein once noted, "if something cannot go on forever, it will stop”.}

Final thoughts

_{Before that happens, governments around the world, including the UK’s, will continue to inflate away their debt through currency debasement.}

_{In its 2024 budget, the Keir Starmer government redefined the concept of debt to allow the UK to borrow an additional £50 billion for infrastructure projects.}

_{As we noted in the}_{previous section}_{, currency debasement, while politically more palatable than default or severe austerity, risks generating even more unstable and volatile economic conditions – witness the sudden collapse in 2023 of three US banks and Credit Suisse, as well as Trump’s escalating tariffs war with China.}

_{The implications for investors are stark: as inflation accelerates once again, money invested in bonds will lose even more value. This raises serious questions about the sustainability of the classic 60 / 40 stocks / bonds portfolio and its numerous iterations.}

_{The fact that central banks are increasingly buying gold and the current US president is making bitcoin a strategic reserve asset makes one wonder just how much further this debt cycle can run.}

_{If investors do the logical thing and buy fewer government bonds and more gold or bitcoin, the yields on those bonds will rise further, making the task of servicing government debt even harder.}

_{It may seem like ancient history now but the UK’s 2022 gilt crisis was a stark warning on the sheer scale of UK government debt, and the difficulty of reversing this entrenched trend.}

_{But there is an even more important lesson here – and it’s one we already raised in an}_{earlier section}_{of this review, but it bears repeating:}

_{“History teaches that if an easy form of money is in widespread use and a new, harder form of money emerges, those who use the hard money will get richer while those left using the easy money will get poorer. This process unfolds at both the individual, business and nation-state level and has repeated throughout history, often with far-reaching consequences for those who fail to transition in time."}

Final thoughts

_{Bitcoin is rapidly becoming the optimal store of value precisely at a time when maintaining wealth is becoming increasingly difficult. For that reason alone, it seems destined to attract more attention from individuals and institutions in the months and years to come. As more people and companies demand bitcoin, its value will continue to rise because its ultimate supply is fixed.}

_{We believe that bitcoin is in the early stages of a long-term growth cycle, and we would like to offer our clients – and their employees – the opportunity to benefit from that.}

_{If you are interested in discussing your specific requirement and the options available to you, please get in contact with Cartwright on 01252 894 883 or send an email to our team at}_{financialfuture@cartwright.co.uk}_.