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Devaluing The Currency

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This tends to get touted as a cure all for economic ailments. So if you get in trouble just devalue the currency, and this has the beneficial effect of reducing imports and making exports cheaper which boosts demand for domestic products.

But really it's about efficiency, so if £1 buys $2 worth of goods but then the exchange rate rises so that you can purchase $4 worth of goods, it's the same as lowering the price and offering double the amount of goods for the same price.

So my question is, why should we devalue the currency and screw people's savings when there are other (arguably) better forms of promoting efficiency, such as lowering taxes and regulations?

Is there something that I'm missing?

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Guest Noodle

This tends to get touted as a cure all for economic ailments. So if you get in trouble just devalue the currency, and this has the beneficial effect of reducing imports and making exports cheaper which boosts demand for domestic products.

But really it's about efficiency, so if £1 buys $2 worth of goods but then the exchange rate rises so that you can purchase $4 worth of goods, it's the same as lowering the price and offering double the amount of goods for the same price.

So my question is, why should we devalue the currency and screw people's savings when there are other (arguably) better forms of promoting efficiency, such as lowering taxes and regulations?

Is there something that I'm missing?

Unless the Asians have become dependent on internal trade financed by the pan-Asian bond market . . . you won't get the chance.

You devalue . . . they devalue.

Not getting out of it that easy, Sonny.

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It is the path of lease resistance, there are more people in uber debt than there is with huge amounts of savings.

Just remembering my tax return clients of which I had 100s it was a swing of about 80% in debt vs 20% who had substantial savings.

Also it works...

Sometimes, S Korea for example has been devaluing its currency since 1997 when it went to the IMF, S Korea is different however they actually export loads of stuff to the Chinese, the Russians and Europeans, they actually make stuff.

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Unless the Asians have become dependent on internal trade financed by the pan-Asian bond market . . . you won't get the chance.

You devalue . . . they devalue.

Not getting out of it that easy, Sonny.

So has it calmed down there yet? News reports that a massive arms cache of RPGs and AK47s were found in a red shirt village. The current Thai Prez blamed Taksim for funding an insurrection, my dad said some news he saw even said the Thai government want to get him indicted for war crimes.

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It is the path of lease resistance, there are more people in uber debt than there is with huge amounts of savings.

Just remembering my tax return clients of which I had 100s it was a swing of about 80% in debt vs 20% who had substantial savings.

I thought savings and debts cancel each other out. If there's £10million of debt in the economy then conversely somebody somewhere is owed a corresponding £10million.

Also are you suggesting that this inflation is beneficial for those that are in debt? I would argue that it would mean the reverse because wages have now been devalued.

Also it works...

I'm sure it does, but for who? It's great for importing countries but for normal people in the exporting countries it means that they have to make do with less.

Edited by Chef

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Guest Noodle

So has it calmed down there yet? News reports that a massive arms cache of RPGs and AK47s were found in a red shirt village. The current Thai Prez blamed Taksim for funding an insurrection, my dad said some news he saw even said the Thai government want to get him indicted for war crimes.

Dunno. Don't care.

Kids birthday party tonight. Bloody great.

Did cake, noodles and a huge spag bol.

She got new shoes and clothes and a new house for her birthday.

Arms caches all over this country, I've been offered AK47's by the neighbours when the wife was after bumping me off.

Wot?

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The currency could be devalued by about 5% a year for the next 5 years and in all probability, nobody would notice. Sure it would add 2-3% to inflation but this has already happened for the past 2 years without much of a fuss. The great british public are only concerned with the price of plasma tv's,computer games,chocolate and McCrapburgers anyhow and as the first two always go down in price and the second two are made smaller each year for the same price, Mr+Mrs hardworking family never notice the difference.

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This tends to get touted as a cure all for economic ailments. So if you get in trouble just devalue the currency, and this has the beneficial effect of reducing imports and making exports cheaper which boosts demand for domestic products.

But really it's about efficiency, so if £1 buys $2 worth of goods but then the exchange rate rises so that you can purchase $4 worth of goods, it's the same as lowering the price and offering double the amount of goods for the same price.

So my question is, why should we devalue the currency and screw people's savings when there are other (arguably) better forms of promoting efficiency, such as lowering taxes and regulations?

Is there something that I'm missing?

No you are not missing much. The beneficial effect of a devaluation is not very lasting. You just begin to import inflation. Your exports will not remain cheaper for long if you need raw materials from abroad to manufacture. It may overcome some short term productivity problems. It is natural balancing effect, not available to the weaker members of the Eurozone!

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This tends to get touted as a cure all for economic ailments. So if you get in trouble just devalue the currency, and this has the beneficial effect of reducing imports and making exports cheaper which boosts demand for domestic products.

Not for all economic ailments, only for those caused by an overvalued currency. Taking the line that a "correct" level for a nation's currency can be determined, and then sustained for all time, is ridiculous.

But really it's about efficiency, so if £1 buys $2 worth of goods but then the exchange rate rises so that you can purchase $4 worth of goods, it's the same as lowering the price and offering double the amount of goods for the same price.

You can buy double the amount of foreign goods. Hence the balance of trade will shift against you. If you're China, running a massive trade surplus, this is desirable. If you're the UK...?

So my question is, why should we devalue the currency and screw people's savings when there are other (arguably) better forms of promoting efficiency, such as lowering taxes and regulations?

We are largely dealing with Ponzi savings. A classic example would be the STR transaction that was funded by a liar loan made by a bankrupt bank ... there's nothing real backing the STR pot. Efficiency can't make this situation good, because the gains will belong those who have earned them -- the Ponzi book can only be closed through default, inflation, or theft.

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No you are not missing much. The beneficial effect of a devaluation is not very lasting. You just begin to import inflation. Your exports will not remain cheaper for long if you need raw materials from abroad to manufacture. It may overcome some short term productivity problems. It is natural balancing effect, not available to the weaker members of the Eurozone!

It's not the only thing that has to happen, if you respond to the imported inflation by raising your wages then you're back to where you started. Devaluation must be linked with lower consumption of imports, otherwise it's pointless.

Bolded bit: it depends on what proportion of your costs are domestic. Things like wage costs, land costs and debt service will all be cheaper in real terms, following a devaluation.

Why does China actively manage its currency to keep it cheaper than it "ought" to be?

Since China is doing the above, doesn't it follow that our currency is overvalued by comparison?

If devaluation is never appropriate or helpful, doesn't that imply that either (1) we are extremely lucky in having the optimum valuation right now or (2) the exchange rate doesn't matter?

Why was the recession of the early 90s so painful, and why did the UK economy bounce back after we left ERM?

Edited by huw

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Been a while since I've been on here. I did a post on this which hopefully explains the devaluation dynamic.

UK Pound Devaluation delusions

In short - no - devaluing does not help, it just continues the rot as history and economic theory proves.

So the Chinese are mistaken, in their policy of maintaining a currency peg that favours their exporters? (Actually I believe they are, because by undervaluing their currency they have overvalued ours, which does nobody any favours in the long run. But in terms of basic economic point-scoring, the Chinese are widely deemed to be ahead of the game).

From the linked article:

When the currency takes a fall the whole nation is immediately given a pay cut, all our imports now go up in price.

...

All these costs eventually come back to the British company as their workers require higher wages to cope with the higher prices.

That's only true where (1) the workers are in a position to successfully demand wage increases and (2) if workers' costs increase to the same extent as the devaluation.

(1) widespread wage-inflation seems unlikely in the foreseeable future, in fact millions of potential workers are idle as a result of sterling being overvalued in the past.

(2) workers' outgoings are split between imports and domestic costs. Chief among ALL their costs are the cost of housing, which falls [edit: in real terms, i.e. relative to the global competition] to the same extent as sterling does (as long as we're not silly with mortgage credit again, if we are then all bets are off no matter what we do).

As for the bit I bolded: the whole nation needs a real pay cut, the point of devaluation is to do it as painlessly as possible. Compare with eurozone workers who have to accept nominal pay cuts, yet still try to meet their rent/mortgage/debt-service.

Edited by huw

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So the Chinese are mistaken, in their policy of maintaining a currency peg that favours their exporters? (Actually I believe they are, because by undervaluing their currency they have overvalued ours, which does nobody any favours in the long run. But in terms of basic economic point-scoring, the Chinese are widely deemed to be ahead of the game).

From the linked article:

That's only true where (1) the workers are in a position to successfully demand wage increases and (2) if workers' costs increase to the same extent as the devaluation.

(1) widespread wage-inflation seems unlikely in the foreseeable future, in fact millions of potential workers are idle as a result of sterling being overvalued in the past.

(2) workers' outgoings are split between imports and domestic costs. Chief among ALL their costs are the cost of housing, which falls [edit: in real terms, i.e. relative to the global competition] to the same extent as sterling does (as long as we're not silly with mortgage credit again, if we are then all bets are off no matter what we do).

As for the bit I bolded: the whole nation needs a real pay cut, the point of devaluation is to do it as painlessly as possible. Compare with eurozone workers who have to accept nominal pay cuts, yet still try to meet their rent/mortgage/debt-service.

China are not actively pursuing devaluing their currency, they just peg it to the Dollar as the communist party are haunted by episodes in history where developing countries or nations moving from communist to capitalist systems have had currency chaos in the markets. Of course the price should be set by the market and currently this isn't doing them any favours.

(1) Regarding worker inflation - workers don't cause inflation, inflation is caused by an expansion in the money supply. If workers don't demand pay rises in the short term then there pay in real terms goes down and they have less opportunity to save. But other costs are unavoidable and these push prices up. Eventually people begin to demand pay rises (Union action, people moving jobs etc) and become wise to the inflation.

(2) How does housing costs fall if you attempt to devalue? Housing costs may look to fall, but when you have to pay more for your energy and food then you have less money for your housing. Plus what happens if you are heavily dependant on external capital (like us) and that flees as people become sick of a depreciating currency? Interest rates rise.

Ok so what if workers costs don't increase? People have a lower standard of living. People become complacent as theres no need to think of new ideas for products in the market, they can just devalue their wages constantly - in effect becoming a low cost destination. Of course it causes the moral fibre of society to weaken - one of the reasons for the UK's relative decline in industry during the 60's and 70's was the fact they kept deluding themselves with currency devaluations.

I admit devaluation is the easy short term option as you can give everyone a paycut by stealth as people look at nominal pay, not real terms pay. So in Greece people don't like to see their pay packet fall. But devaluation never works and never will.

If it all was that easy why don't we just keep devaluing the currency all the time, if its that easy to obtain prosperity? Robert Mugabe believed so.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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