Governments assume they can print as much currency as they like and it will be accepted by force. However, the history of fiat currencies is always the same: first governments exceed their credit limits, then ignore all the warning signs and finally see the currency collapse.

Today, we are living the decline of developed economies’ fiat currencies in real time. The global reserve system is slowly but decisively diversifying away from a pure fiat currency anchor towards a mixed regime where gold plays the dominant role, not fiat currencies.

IMF COFER data show that, while the US dollar still dominates, its share of reported reserves has drifted down towards the high 50s. Gold has overtaken the US dollar and euro as the main asset in central banks for the first time in 40 years.

There is a reason for this historic change. Developed economies have surpassed all their limits to indebtedness.

Public debt is currency issuance, and the credibility of developed nations as issuers is fading fast. It started when the ECB, the Fed and major global central banks reported large losses. Their asset base was yielding negative returns as inflation and solvency issues became evident. Mainstream economists and governments dismissed these losses as insignificant, yet they demonstrated the extreme risk associated with the asset purchases made in previous years.

Inflation is a form of de facto gradual default on issued obligations, and global central banks are avoiding the debt of developed nations because they see a deterioration in the fiscal and inflationary outlook. Sovereign debt is not a reserve asset anymore.

Global public debt has reached about 102 trillion dollars, a new historical record, well above pre‑pandemic levels and close to the peaks hit during the most aggressive monetary expansion. Sovereign debt has driven this phenomenal rise, with countries like France and the United States running enormous annual deficits in non-crisis periods. Bidenomics in the United States was the clearest evidence of imprudent fiscal policy, running record deficits and increasing spending by more than two trillion US dollars in a period of strong economic recovery.

How did this loss of confidence happen? Monetary sovereign nations do not have an unlimited ability to issue currency and debt. They have clear limits that, when surpassed, generate an immediate loss of global confidence. Developed economies have breached the three limits, especially since 2021:

The economic limit is reached when ever-higher debt leads to a decrease in marginal growth. Government spending has bloated GDP, but productivity has stalled and net real wages are stagnant or declining.

The fiscal limit arises from the crowding out of productive investment by interest expense and entitlement spending. Despite financial repression, low rates, and monetary stimulus, interest expenses are taking up larger portions of developed nations’ budgets, making financing government obligations more expensive, even as the annualised CPI moderates.

The inflationary limit is reached as repeated monetary financing of government spending erodes confidence in the purchasing power of fiat money and cumulative inflation outpaces real wages, creating an affordability crisis.

The recent combination of high nominal debt, rising interest expense, and structural fiscal deficits in major advanced economies proves this crossing of all limits.

Central banks understand fiat money and know that sovereign debt is not the safe asset that provides stability and real economic returns anymore. Thus, they have responded with an unprecedented wave of gold purchases. Net official buying exceeded 1,100 tonnes in 2022 and remained above 1,000 tonnes in both 2023 and 2024, more than double the annual average between 2010 and 2021. By 2024, central banks officially purchased 1,045 tonnes of gold, marking the third consecutive year above the 1,000‑tonne level and extending a 15‑year streak of net additions. However, unofficial purchases are estimated to be significantly larger. Surveys show that around a third of global central banks plan to increase their gold holdings in the coming years, and more than four‑fifths expect global official gold holdings to keep rising due to concerns over persistent inflation, financial stability, and solvency issues.

The record gold demand is a direct answer to the lack of confidence in the sustainability of fiat liabilities issued by over‑indebted sovereigns. Gold has no default risk and no central bank control, making it a suitable investment when central banks themselves doubt the long‑term credibility of large nations’ currencies. ​

Many reserve managers believe that the way governments are heavily increasing their money supply during crises, along with only slow returns to normal policies, means that inflation and financial control are now permanent parts of the system instead of just temporary fixes. Thus, purchasing gold reserves is an insurance policy against the gradual taxation of savers through negative real yields and inflation.

Such an outcome does not mean an imminent collapse of the US dollar nor a dedollarisation process, but an unquestionable loss of confidence in fiat currencies altogether, from the euro and the pound to the yen and the US dollar. Indeed, the US dollar remains the dominant fiat currency, accounting for 89% of global transactions and holding 57% of global reserves. But it leads a declining empire of fake money.

Investors and central banks are moving to a hybrid reserve order in which fiat currencies coexist with a structurally higher allocation to gold but also a rising use of decentralised cryptocurrencies.

Some central banks are in panic. The ECB aims to enforce the use of the euro by implementing a central bank digital currency, but this misguided approach reflects both desperation and a desire for control. The Fed and the US government are incentivising stablecoins backed by Treasury bonds as a way of boosting demand for the dollar. This seems a better idea than imposition and repression, especially when the US government seems focused on reducing the deficit and debt. However, if the US government does not accelerate measures to reduce debt through growth policies and spending cuts, the confidence in the currency may weaken fast.

No government in advanced economies wants to cut spending, except perhaps the US administration, which is doing so modestly, despite evidence indicating a loss of confidence in its solvency. With economies facing government debt ratios above 100 percent of GDP, persistent primary deficits, and political resistance to serious spending cuts, fiat currency issuers are likely to remain trapped beyond economic, fiscal, and inflationary limits.

We are living through a historical monetary change that will have long-term implications. Global central banks have stopped believing in paper promises and demand real money. The first nation to adopt sound money and fiscal policies will win. The rest will lose.