Inflation Devalues Currency: The Aussie Dollar Loses Value Every Year

Every Sunday morning hundreds of tourists, sellers and buyers flock to Plaza Mayor, one of Madrid’s main squares.

They gather for the largest numismatic market in Spain, where you can buy and sell coins from any time period or country around the world.

Free report: Aussie dollar crunch coming (find out why)

But it’s not just coins. You can also find plenty of other collectables, stuff like stamps, comics, books and antiques.

The market has been going every Sunday since 1927, when a group of collectors started meeting to exchange pieces.

And then it started growing.

In fact, it got so popular that in 1959 Madrid’s town hall started limiting the number of stalls by forcing people to apply for a permit.

As a kid, I spent quite a few Sundays in this crowded market. My mother had inherited from her grandfather several rare coins and she was looking to expand the collection.

While my mother haggled with the sellers, I scanned the stalls for second-hand books. Soon enough I also started to get interested in coins, and that interest expanded to paper money.

It’s something I still collect today. The more I’ve travelled, the more my collection has expanded.

To be honest, I have no idea of its value today, or if it will ever have any value at all. It’s something I do for fun, a way to hold a piece of economic history in your hands.

You’ll understand what I mean when you see this banknote:

The Rum Rebellion 09-11-19

Source: Selva Freigedo

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This is 250 Iraqi dinars. The man featured is Iraqi ex-president Saddam Hussein. These will never be issued again.

In fact, several currencies I have don’t exist anymore. Currencies like the Italian lira, which got replaced by the Euro.

Or this one, five thousand Australes, a currency issued by Argentina:

The Rum Rebellion 09-11-19

Source: Selva Freigedo

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The austral didn’t last very long, its life was short and turbulent.

Back in 1985, Argentina was coming out from a military dictatorship which had left a large inheritance of debt and inflation.

To stave off inflation, the Argentinean government replaced the currency at the time, the Argentinean peso, for the austral. They also slashed three zeros. One austral would equal 1,000 of the old Argentinean pesos.

The plan worked, at first…

The new Austral came out strong, with one Austral worth around 80 cents of a US dollar.

That’s right, this would make the banknote pictured above worth about US$4,000. That is, if it had existed at the time.

But when the austral came to life, the central bank only issued notes in the value of 1, 5, 10 and 50 australes.

Now let me show you something.

The chart below shows the historical exchange rate between the Argentinean austral and the US dollar per month between 1982 and 1992.

The Rum Rebellion 09-11-19

Source: Wikipedia

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As you can see, the exchange rate remained stable from the later months of 1985 till the end of 1986.

But that didn’t last.

Inflation creeped up in 1987.

The austral started to lose ground against the US dollar because the government had kept on printing money and expanding the money supply to pay off debt.

By 1988, inflation started to get out of control…and then came hyperinflation.

I remember those times, prices changed by the hour.

To keep up with hyperinflation, the government had to print larger and larger value notes: 1,000, 5,000 and 10,000.

At one point, they even issued emergency money in the value of up to 500,000 to keep money circulating. Remember, there was no tap and go at the time, people were literally carrying millions in their wallets.

By 1990, the austral had devalued by over 5,000% since 1985 against the US dollar.

In 1992, it was all over.

After seven years in circulation, hyperinflation had slaughtered the Argentinean austral. The austral was then replaced by the new Argentinean peso.

The point I’m trying to make is that all currencies eventually gravitate towards zero, because of inflation. The more the money supply expands, the less your money is worth.

Inflation in Australia…

In Australia, the Reserve Bank of Australia has in place an inflation target of around 2–3%.

In other words, they have a mandate to devalue the currency by at least 2% per year. Every year the Australian dollar loses value.

Visual Capitalist has a great chart illustrating this for the US dollar. You can see it here.

On their chart, a single US dollar in the 1900s would buy you a pair of leather shoes back then. Today that same dollar barely gets you a song on iTunes.

At the same time the money supply for the US dollar has expanded from US$7 billion in the 1900s to US$4,917 billion by the turn of this century.

After 2008, the US Federal Reserve has flushed the system with liquidity. They increased their balance sheet by US$4.5 trillion through purchases of debt and mortgage backed securities.

By 2017, according to Visual Capitalist, the US dollar money supply stood at US$13,291.

But differently from Argentina in the 1980s, all this ‘money printing’ hasn’t created hyperinflation, or even inflation.

Well, kind of.

Money printing in this way is not creating inflation in the wider economy or translating into higher salaries…at least not yet.

Instead much of that money has been flowing into assets. It’s why we are seeing inflation in things like stock prices and property.

Central banks are struggling to create inflation for the wider economy. So far, inflation is staying low…or at least hidden.

Their idea now is to keep on doing this until we get inflation.

But my point is, if inflation destroys the value of a currency, low inflation means that money retains better some of its value.

It’s why we may see the dollar stretch further. Especially if prices start dropping as consumption slows.

Before I sign off, I wanted to remind you that economist Harry Dent is coming back to Australia this November.

I had the pleasure of meeting Harry earlier this year and let me tell you, he has a unique voice, and is a great speaker. Harry studies cycles and data to predict the effects of demographic trends in the economy.

If you haven’t got a ticket yet to hear Harry Dent speak live, subscribers to The Rum Rebellion can get FREE tickets here.

Just to be clear, this isn’t a Port Phillip Publishing event.


Selva Freigedo Signature
Selva Freigedo,
Editor, The Rum Rebellion

PS: WARNING – Here’s two reasons why the AUD could collapse in 2020. Download your free report. 

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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