An argument amongst monetarists is whether or not currency devaluations are productive. Some economists believe devaluation can cause great inflationary pressures. First, I would like to give a brief overview of the concept of devaluing of the dollar. One important note is that all currencies at some point have been devalued at one time or another. When a country imports more than it exports, there will be pressure on that country's currency to devalue. However, if the trade deficit is offset by inflows of capital( for investment purposes), the country can continue to run the trade deficit without having to devalue. When a government devalues its currency, it is often because the interaction of market forces and policy decisions has …show more content…
For example, rather than implementing unpopular fiscal spending policies, a government might try to use devaluation to boost aggregate demand in the economy in an effort to fight unemployment. If observers believe that the government will not be able to defend it's currency, they may very well attempt to profit from the devaluation. There is very little risk when trying to profit from a currency devaluing. The most that is likely to be lost is the mere transaction costs. If an observer is right, then there can be a large profit at the end of the rainbow. George Saros profited over $1 billion when Great Britain devalued in …show more content…
Incidents of this nature can push the economy into a recession, hence pushing down stock prices. Devaluation can also be an opportunity for companies. The devaluing of a currency can permit the country's government to roll over debt that would currently be due. Governments could also be forced to make structural adjustments in their economies. The International Monetary fund often oversees this restructuring. Devaluations make exports cheaper, and imports more expensive. To that end, many countries use currency devaluations as a means to achieve national economic and social goals(ie: slimming trade deficits, boosting exports,increase of domestic employment). Some countries with persistent devaluations often end up with large trade deficits and weak currencies, while countries with strong currencies such as Switzerland and Japan have strong currencies and trade surpluses. Countries such as China and Taiwan have large trade surpluses but their coinage is not considered stable currency. The U.S. dollar is considered a world currency, and is used to trade by many countries. Despite this fact, the U.S. has had a trade deficit for over a quarter of a century. A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government
Inflation is one of the main reasons for raising the interest rate, but currently inflation is not doing it usual numbers when it comes to a growing economy. It is expected for inflation to rise during this period but it is fact currently falling. So if inflation isn’t rising as expected that leads to the dollar being stronger than expect as well. Now a strong dollar is good and bad, it is bad because it will cause our exports to cost more for other countries. With a lot of other economies struggling recently the U.S. exports could take a hit because of lower conversion rates. Now if the Fed raises the interest rate to combat inflation the strength of the dollar may stay high, which in turn could hurt the export market of our
On the other hand, there are disadvantages to weakening dollar. The weak dollar is bad for American citizens. Weaken dollar lifted import price. Consumers face higher prices on foreign products or services.
The author examined the case study presented in the critical thinking exercise, When Money Loses Its Meaning. The case study describes the hyperinflation disaster in Germany during the 1920’s. In addition, the case study describes similar situations in other countries to include Bolivia in the 1980’s, Hungary after World War II, and Yugoslavia in the 1990’s. In this paper, the author will discuss the reasons behind Germany’s hyperinflation disaster, the prospect of hyperinflation in the United States, and the role of the Federal Reserve in controlling inflation.
By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the eventual market collapse were low wages, the proliferation of debt, a weak agriculture, and an excess of large bank loans that could not be
...current trade deficit. Yes there will be benefits associated with increase global competitiveness of the US products. However, there are other factors not associated with Chinese currency affecting the US global trade competitiveness. A case in point is the fact that from 2005 to 2008 when China allowed it currency to appreciate by 21%, a 30.1% rise of US trade deficit with China was still experienced. In addition by further putting pressure on China to devalue its currency, US runs a major risk of losing on capital inflows coming particularly from Chinese investors.
Some investors lost their life savings and everything they had. Then, people who had never even owned one share of stock were affected. Banks loan large sums of money out to high risk businesses and consumers in order to profit from the interest on the loans. These high-risk businesses and consumers were unable to repay these loans when the stock market crashed. People also ran to the bank to take out their money, which were called bank runs, for fear that the bank would run out of money.
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
...price and devaluation of the domestic currency to bring it back to A from A’ the country has to sell off its Foreign assets.
Thailand implements a controlled floating exchange rate system, pricing to market forces on the Thai baht, and the Thai central bank would only intervene in the market when necessary, in order to avoid excessive exchange rate volatility to the expected impact of economic policies. At present, the global economic slowdown, domestic demand is not good in Thailand. In order to keep the country's export competitiveness, the Bank of Thailand is more inclined to let the baht weaken.
Fixed exchange rate which is at times known as pegged exchange rate is an exchange rate regime where a country’s currency value is fixed against the value of another currency or to another measure of value such as gold.
To put it simply, the exchange rate is a price. As with any other market, price is determined by supply and demand. Whenever they are not equivalent, the exchange rate would change. However, the reality comes to be far more complicated.
For more than sixty years the United States dollar has been the central reserve currency for the world. A reserve currency, also referred to as an anchor currency, is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves (Carbaugh, 2011). As the world’s reserve currency, the U.S. dollar is used throughout the world as a medium of exchange and is used as the global currency for products traded within the global market. In recent years the status of the U.S. dollar has been contested by a select few around the world. Leaders are unconvinced about the future of the United States economy as their deficits are exceeding record highs. The following analysis will discuss the history of the world reserve currency, how the U.S. dollar became the controlling currency and the benefits the U.S. has experienced as a result of having the controlling currency. Presenting analysis will also discuss the cause of mounting concerns over the future of the United States as well as the effects if the dollar was to lose its status as the world’s reserve currency. Finally, alternatives for the dollar will be evaluated as well as what the United States can do to maintain the standing of the dollar.
There are different factors that lead to debt crises, like Oil shock prices, which is when a price increase, then every single price for the product will increase. Everything depends on oil, the economy will not work well without petrol which is oil, for example shipments and transportation. If there was no shipments and no transportation then there will also be no exports and no import, which will also lead to no profit and that will cause debt crisis. Another factors that leads to debt crisis is interest rate developments, aggressive bank lending, mismanagement or corruption in LDC’s, like poor citizens in the country and the president owns the money to himself. There is also another f...
As an aftereffect of inflation, the purchasing power of a unit of money falls. For instance, a pack of gum that costs $1 and if inflation rate is 2% then in a given year will cost $1.02 the following year. As products and services require more cash to buy, the implicit value of that currency falls.
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.