Devaluation of Currency Is a Trick

TEHRAN (Iran News)In economic literature, debts are defined in nominal terms. When you borrow 1,000 dollars, you must repay 1,000 dollars; however, the purchasing power of that 1,000 dollars over time is what matters. This is why inflation and currency devaluation reduce the purchasing power of money. Therefore, when a debt matures, the real value of the money being repaid is lower than the real value of the money that was originally borrowed.

This benefits the debtor (including governments, banks, companies, and individuals) and harms the creditor (such as bondholders, banks, and others).

Today, governments are the largest debtors worldwide. They borrow money from the public and from domestic and foreign institutions by issuing bonds. When a central bank (such as the Federal Reserve or the European Central Bank) implements expansionary monetary policies (money printing, asset purchases, lowering interest rates), it contributes to the creation of inflation. In an inflationary environment, the government receives higher nominal tax revenues (because wages and prices rise), while its debt remains fixed in nominal terms. As a result, the debt-to-GDP ratio (which is the main metric) can improve.

This policy disproportionately harms the poor and those with fixed incomes, because their purchasing power declines, while the assets of shareholders and property owners may retain their nominal value. If this approach becomes entrenched, it can lead to hyperinflation and a complete collapse of trust in the currency (as seen historically in Germany, Zimbabwe, and Venezuela). Moreover, if all countries attempt to artificially devalue their currencies in order to boost exports and reduce their real debt burdens, it can lead to global instability and currency wars. If inflation spirals out of control, central banks are forced to sharply raise interest rates to contain it, which can itself cause recession and increase the cost of servicing new debt.

For this reason, the world’s major central banks (especially the Federal Reserve) adopted extraordinarily expansionary monetary policies, which led to massive increases in their balance sheets. This injection of liquidity into the economy, combined with supply chain disruptions, has fueled part of the current inflation in many countries. Many economists believe that part of the strategy for exiting these massive debt levels is to allow inflation to exceed the interest rate on government bonds (that is, to maintain negative real interest rates). This systematically reduces the burden of debt.

Thus, it can be stated decisively that currency devaluation is one of the historical and indirect tools for reducing the real burden of unpayable debts. However, monetary authorities must understand that this is a double-edged sword and cannot be considered a sustainable “solution.” If left uncontrolled, it can lead to social instability, the destruction of savings, and deeper crises. The sustainable solution for strengthening debt repayment capacity is the creation of economic growth, which balances the value of production volume against liquidity.