Historically a devaluation of a currency has rarely been a
preferred strategy and at least until the 21st century, a strong currency was
commonly associated with weak governments. Devaluation can lead to a reduction
in the purchasing power as their standard of living is reduced both when they
buy imports and when they travel abroad. As a consequence it also adds to the
inflationary pressure and can make interest payments on international debt more
expensive if those debts are denominated foreign currency and often discourage
foreign investors to invest. Western governments hoped that this could be their
magic solution to current crisis. Slowly but surely a higher number of
countries have been entering the currency war, the most recent one is the
Switzerland by pegging the Franc to the Euro.
As the price of one particular currency drops the real price
of exports also drops. At the same time imports come more expensive therefore
the domestic industry receives a boost in demand at home and abroad. This is
something the Chinese government has done for long time by manipulating their
currency. Over the last few years China has been criticised a lot for keeping
their currency low, mainly by the United States.
Now this is a tactic that other western countries
have been taking up by using QE (quantitative easing). The Bank of Japan was
the first central bank in the world to use this form of policy but was followed
by many other westerns countries, mostly in the US and UK. The Federal Reserve
made USD$600 billion available for the purchase of financial assets to put into
the system. Most recently the Swiss Franc joined the currency war by putting a
floor to the Swiss Frank and not allowing it to get any stronger.
Next blog we will look into Inside Job and discuss if its reliable or not mainly by focusing on the part about Iceland as I am Icelandic
Next blog we will look into Inside Job and discuss if its reliable or not mainly by focusing on the part about Iceland as I am Icelandic
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Further reading
http://www.economist.com/node/17251850
As you note, currency wars have been intensifying, do you believe a return to something similar to the Gold Standard would be appropriate?
ReplyDeleteI think taking up the Gold Standard would step backward. Our systems are a lot more developed today than they were when the gold standard was in use. They will have to come up with a new system once more. There is a need for a change, the question is just will it happen in the next 5 years or 50?
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