What is a currency reset?

A currency reset is a process where a new currency is introduced to replace the existing one, usually during times of financial crisis. It typically happens when the public has lost confidence in the currency, leading to a falling exchange rate, or when a country is experiencing hyper-inflation. The cause of a failing currency is often linked to the over-indebtedness of the government and the perception that it has lost the ability to repay what it owes.

This perception, coupled with profligate overspending and a perceived inability to raise taxes, can lead to a loss of confidence in the currency and make a reset more likely.

The process of currency reset varies each time, but it typically involves changing the old currency for a new one. Individuals may be allowed to change some of their old bank notes into new ones, up to a certain limit, and bank balances up to a certain limit may also be changed into the new currency. However, the exchange rate between old and new currency is rarely 1:1. Small balances up to a certain limit might be exchanged at a rate of 1:1, while larger balances receive a far worse exchange rate, of say, 1 for 20 or 1 for 100.

It's important to note that not all balances are treated equally during a currency reset. Larger balances often receive less favorable treatment than small balances. Holders of larger bank deposits or cash may only receive a fraction of their balance.

Foreign currency holders often receive less favorable treatment than domestic holders of the currency. Corporations may also be treated differently from individuals. Special rules may apply to certain types of institutions, such as banks, pension funds, foreign governments, international institutions, government agencies, and the government itself.

Bonds, mortgages, loans, and private debts can, and often do, remain in the old currency, but the rules might change this. Usually, government debt is not converted, or at best, only partially converted to the new currency.

The new currency often comes with the promise that it is pegged to something valuable, and there are promised "safeguards" to ensure that the loss of value seen in the old currency will never happen again.

A “gold-backed” currency would have more credibility than a currency merely backed by the same worthless promises of the previous one. However, if the new currency is backed by something tangible, such as gold, then that new promise is only valuable while it lasts.

It is crucial to prepare early for a currency reset. Nobody will ring a bell before the next crisis. When things start to unwind, everyone will have the same idea as you. If you wait until the last minute, you may find empty shelves and closed doors. It is important to prepare early by diversifying your assets and having a plan in place for when a currency reset occurs. Don't be like Cinderella, leaving it to the last minute.