(Fiat) Money as Securitization – an impending crisis?

Google Dictionary defines securitisation as the process of “conversion of asset into marketable securities.” Investopedia defines Securitisation “as the procedure where an issuer designs a marketable financial instrument by merging or pooling various financial assets into one group.”

Money or Currency or Bank Notes is in my opinion, one of the earliest examples of securitisation, even before the term itself originated. Bank notes (currency) are asset backed – initially bullion, gold and silver and now principally, Securities issued by the Government.

Initially, the Bank Notes could be redeemed at issuing office of the Bank, in exchange for pre-determined quantity of Bullion. However, gradually, by legislation, various governments, made paper money inconvertible to bullion exchange – the advent of fiat. Further, to fund growth by keynesian economic policies and government budgetary deficit, Central Banks have resorted to to printing ever increasing amounts of bank notes and government debt securities.

The Securitization induced Financial Crisis of 2008 – initially, the Collateralized Debt Obligations (CDOs) were prime asset backed but with Synthetic CDOs & other exotic instruments – gradually the amount of money invested far exceeded the amount of underlying asset backed securities – may be we could also call them “fiat securities”. The 2008 Financial Crisis was precipitated by the fact of loan delinquencies and consequently falling real estate asset prices but magnified by Fiat securities.

The CoViD-19 pandemic incited Economic depression, leading to contraction in Gross Domestic Product across the globe, in varying proportions, and an increase in fiat money printing & issuance of government securities to fund government expenditure and keynesian economic policies further embraced to stimulate demand, employment and economic growth, a ballooning Debt-to-GDP ratio is rather obvious.

The effects we are now seeing is asset price inflation – more of (fiat) money chasing fewer assets – stocks, real estate, even commodities such as metals and crude oil, and bullion and also initially decreasing interest rates (bond yields).

The anticipated response to inflation (far more (fiat) money chasing fewer goods and services (due to economic contraction)) is a reverse monetary cycle – an increase in central bank benchmark rates – interest rates (bond yields).

The key question is whether vulnerable economies will face economic collapse due to economic contraction, inflation and higher debt & debt servicing costs. We also need to note that these vulnerable economies also have foreign currency denominated external debt and that domestic currency depreciation can further increase the debt as well as the debt servicing costs – leading to a vicious circle.

The only paper I came across on Google referring to Fiat Money as Securitisation this : 

Why fiat money is a safe asset by Dirk Paulsen 


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