Solving The Problem of Currency Debasement

What Can We Do about Currency Debasement?

Currency debasement requires a two-pronged approach: systemic changes at the government level (including the Federal Reserve) to maintain fiscal responsibility, and personal financial strategies to protect individual purchasing power.

Government and Systemic Solutions

For a society to address debasement (which often manifests as long-term inflation), policy changes are needed to ensure the currency’s stability and public confidence.

Fiscal Discipline: Governments need to avoid excessive spending and borrowing that necessitate printing more money. This could involve politically difficult choices like cutting spending or raising taxes to balance budgets over time.

Monetary Policy Reform: Central banks can control the money supply and interest rates to manage inflation. Maintaining a credible commitment to price stability and structurally positive real interest rates (interest rates higher than the inflation rate) helps.

Economic Reforms: Promoting productivity, attracting foreign investment, and fostering a strong, competitive economy can help maintain confidence in the national currency.

Sound Money Principles: Some suggest a return to linking currency to a scarce, tangible asset (like gold, historically) or adopting a rules-based monetary system to limit arbitrary money creation.

Individual Solutions

Since systemic changes are often slow and beyond an individual’s direct control, people can take steps to protect their personal wealth from the effects of debasement.

Invest in Productive or Scarce Assets: Holding idle cash is a “sure way to lose wealth over time” due to the erosion of purchasing power. Instead, individuals can invest in assets that tend to outpace inflation, such as:

Stocks/Equities: Investing in the stock market makes you a part-owner of companies that create value and can potentially outrun debasement through pricing power.

Real Assets: Gold, silver, commodities, and real estate have intrinsic value and can serve as effective hedges against currency devaluation.

Diversify Investments: Holding a variety of non-correlated assets across different currencies can help mitigate risk.

Invest in Yourself: Enhancing your skills and education (human capital) can lead to improved productivity and earning power, a valuable asset in any economic environment.

Manage Debt Wisely: Focus on paying down debt, as increased inflation can sometimes make it easier to repay with “cheaper” money; however, high debt levels can be risky during economic instability.