TLDR; Since we left the gold standard in the 1970′, inflation started to soar. After a while inflation started to decline as to today level. This is mostly because of China entering the global economy in the 1980′. An enormous workforce entered the scene and suppressed the cost of labor. China’s workforce will soon start to decline and will probably do so for at least 30 years. Hence we will have higher labor cost resulting in higher inflation on fiat money. Fiats might not survive higher inflation and thus alternatives will be more desired (Bitcoin).
“We have lived in an era of fiat money since the early 1970s. Since then virtually all money in existence has only had a value based on trust and, in particular, trust in governments’ ability to maintain its value. Prior to this period, most of the money in existence through history was backed by a commodity — usually a precious metal like gold or silver. When money broke loose from such an arrangement inflation tended to increase (often dramatically), and when money returned to it inflation was becalmed. We think fiat money systems should be inherently unstable and prone to high inflation all other things being equal. Politically it is always too tempting to create money when nothing is backing it. That this current fiat system has survived so long has required a fortuitous set of global forces across multiple decades that have created sizable natural offsetting disinflationary forces. The forces that have held the current fiat system together now look fragile and they could unravel in the 2020s. If so, that will start to lead to a backlash against fiat money and demand for alternative currencies, such as gold or crypto could soar. “
“ Inflation in the twentieth century had a strange journey. After the gold based Bretton Woods global system collapsed in the early 1970s it contributed to a huge rise in inflation across the globe during the remainder of the decade. Although the oil shocks were partly to blame, the fact that the shackles of the Bretton Woods system were removed, and countries were freer to borrow and find ways of liberalizing finance and credit, surely contributed to the inflation surge. “
“By the end of the 1970s, some feared the battle against inflation would be lost. Then a miracle occurred. Inflation began a 40-year structural decline that stretches to the current day and concerns about fiat currencies have been virtually non-existent. [..] Chinese demographics were arguably the biggest suppressors of global inflation over the last four decades. At work was an extraordinary surge in the global labor supply at a time when globalization and deregulation in the global economy were taking off. As such, for the last 40 years, pressure on wages, prices, and with them inflation, has been under constant pressure. And that occurred independent of central bank or government policy. “
“[…] The peak of the ’working age population’ in the More Developed World plus China occurred this past decade. As we move into a new decade, the supply of labor from the key global regions will, in aggregate, start to decline. “
“Will fiat currencies survive if labor’s share of GDP reverses? Addressing the increasing gap between capital and labor with higher wages would undoubtedly be good news. However the problem for the current global monetary system is that over the last 45–50 years it has relied on governments and central banks being able to turn on the stimulus spigots at the drop of a hat when a crisis has come. This has enabled each crisis to be dealt with via increasing leverage rather than creative destruction type policies. For this to be possible an offset has been needed to such stimulus to prevent such policies being inflationary. Fortunately (or unfortunately if you believe it is an inherently unstable equilibrium) the external global downward pressure on labor costs ensured that this occurred. “
“So what will happen to the global monetary system if labor costs start to reverse their 40-year trend? If central banks have their current mandates of keeping inflation around two per cent then they will be duty bound to tighten policy more often regardless of the external environment. However, such an outcome is probably unrealistic given how much debt there is at a global level. Governments will surely first change central bank mandates to allow for higher inflation or look to reduce their independence rather than allow interest rates to rise and make debt levels uncomfortable. Ultimately, if and when labor costs rise at the margin rather than fall, there will likely be a more difficult environment for policy makers. And where politicians are worried about elections, it is likely that inflation will be the casualty. “
“Higher trending inflation will mean bond yields become very vulnerable, especially relative to near record (multi-century) lows apparent today. Given the near record level debt burdens around the world, it is likely that central banks will be forced to buy more securities again to ensure yields stays comfortably below nominal GDP. In turn, this will likely lock in higher inflation as negative real yields will eventuate, and thus very loose financial conditions and higher wages. Eventually, it is possible that inflation will become more and more embedded in our system and doubts will rise about the sustainability of fiat money. The demand for alternative currencies will therefore likely be significantly higher by the time 2030 rolls around. Will fiat currencies survive the policy dilemma that authorities will experience as they try to balance higher yields with record levels of debt? That’s the multi-trillion dollar (or bitcoin) question for the decade ahead. “