Internal vs external currency stability

[Machjo]

If country A should decide to inflate its currency, that will naturally cause country B's currency to appreciate in relation to country A's, all else being equal of course.

At that stage, country B is forced to make a decision. If it wishes to maintain currency stability within its borders (i.e. counter inflation domestically) then it has no choice but to accept the appreciation of its currency in relation to country A's. If it wishes to maintain parity with country A's currency, then it has no choice but to adopt an inflationary policy of its own.

Which do you think is more important between maintaining domestic currency stability vs inter-currency stability?

Edited March 18, 2010 by Machjo

[Bonam]

I'd say domestic. Having a rapidly changing value of currency in a country leads to substantial instability, economic uncertainty, not just for big manufacturing companies but for everyone. If a currency rapidly appreciates, you need to start taking that into account when buying goods, potentially reducing the value of savings, etc.

On the other hand, having a currency fluctuate in relation to a foreign currency only strongly affects those people that have extensive dealings with another country. Additionally, it has both benefits and disadvantages, it is not necessarily an overall "bad" thing, whereas rapid and unpredictable inflation within a country is.

[Machjo]

I'd say domestic. Having a rapidly changing value of currency in a country leads to substantial instability, economic uncertainty, not just for big manufacturing companies but for everyone. If a currency rapidly appreciates, you need to start taking that into account when buying goods, potentially reducing the value of savings, etc.

On the other hand, having a currency fluctuate in relation to a foreign currency only strongly affects those people that have extensive dealings with another country. Additionally, it has both benefits and disadvantages, it is not necessarily an overall "bad" thing, whereas rapid and unpredictable inflation within a country is.

I tend to agree overall. I'm not saying that inter-currency fluctuations don't affect us, but merely that there really isn't much we can do about it unless we're willing to ignore domestic currency stability in exchange for inter-currency stability. I'd say keep the currency's local value under control and let it float as it may in relation to other currencies.

[Moonbox]

I think the question itself is kind of silly. Since currencies are always valued to international counterparts, any change in values is based on external and internal influences at the same time. If one country chooses to devalue their currency, it doesn't necessarily mean ours is worth more. In fact, demand for ours could stay the same. The only thing that has changed is the external comparison.

What governments should aim for then is currency predictability. Long-term, a government can't really control exchange rates without causing other problems along with it (inflation/deflation, debt ect), thus it's more a matter of smoothing down the sharp spikes up in down in the currency value. Surprises hurt the economy, whether they be external or internal. Long term currency trends, however, can be accounted and adjusted for.

Edited March 18, 2010 by Moonbox

[Pliny]

If one country chooses to devalue their currency, it doesn't necessarily mean ours is worth more.

Then what is it actually being devalued against and what would be the purpose of intentionally devaluing a currency?

What governments should aim for then is currency predictability. Long-term, a government can't really control exchange rates without causing other problems along with it (inflation/deflation, debt ect), thus it's more a matter of smoothing down the sharp spikes up in down in the currency value. Surprises hurt the economy, whether they be external or internal. Long term currency trends, however, can be accounted and adjusted for.

Predictability is important to entrepreneurial and capitalist enterprises. Government control of currency and it's taxation policies are added risks to predictability. Since government policy affects the entire economy changes in it's policies can be big surprises and indeed unsettling. Surprises in regular economic activity are the risk that entrepreneurs take and do not affect the aggregate, government policy does.

[Pliny]

I believe both are important.

In an economy where currency, in its various forms, is not tied to the production of wealth, problems will arise. The calculation of value being dependent upon government policy is itself a destabilizing variable. A conglomeration of nations with control over their own currencies is a big variable.

Currency traders rely on these variables and take their risks on the currency markets. Stable currencies are not really in the interests of that industry. They make or lose their "bets" on change in the currency market.

Countries are able to go to war by creating credit if they wish so we all have to be on the same page if we want stability or else we live with instability. We are not currently all on the same page.

Does a stable currency make a stable economy? What makes an economy stable and what makes a currency stable.

The stability of both, in my opinion, are dependent upon the individual's ability to retain the value of his production. Threats to that result in reduced production. Government policy regarding currency is generally inflationary and is a threat to the individual's retention of the value of his production. But a government in control of the currency has to inflate in order to maintain it's own stability, if it is to grow, and we all know how hard it is to shrink government.

As we see in the recent sub-prime mortgage crash social policy often conflicts with economic reality. While business in the economy reorganizes and restructures government does no such thing.

It tries to save it's revenue base and bails out those sectors that provide it's greatest revenues and whoever it considers will be beneficial to the economy. The biggest growth in government occurs at these times.

[Moonbox]

Then what is it actually being devalued against and what would be the purpose of intentionally devaluing a currency?

That's the point I'm trying to make. Currency stability is based on both internal and external factors, and you can't talk about one without the other.

Also, there are lots of simple reasons to devalue your currency. Some popular ones are to encourage exports and to artificially reduce fixed-rate debt.

Predictability is important to entrepreneurial and capitalist enterprises. Government control of currency and it's taxation policies are added risks to predictability. Since government policy affects the entire economy changes in it's policies can be big surprises and indeed unsettling. Surprises in regular economic activity are the risk that entrepreneurs take and do not affect the aggregate, government policy does.

Predictability is important to everyone. If it affects businesses, it can affect workers as well. Rapid/unexpected currency appreciation can run companies out of business and thousands out of their jobs.

[dre]

To answer your question you need to look at what deflation and inflation really are. Theyre based on the size of your own economy. You either dont have enough government backed currency for the ammount of goods in the market place, or you have too much government backed currency for the ammount of goods.

Ideally you want to keep the purchase power of the dollar stable against a diverse basket of goods and services in your own economy. If you dont do this, then the currency because useless as tender for deals and contracts (especially long term ones) and you discourage economic activity.

International deals on the other hand should be denominated in the most stable units possible, and often wont be based on your own currency anyways.

So definately domestic stability is whats important.

[Moonbox]

So definately domestic stability is whats important.

They're both important. The central banks are all in contact with each other on a regular basis because nobody wants the boat to get rocked to hard. Foreign currency volatility can directly affect domestic stability (imports/exports/jobs gained/lost) and any central banker has to take these factors into account.

I still think this is a really silly question and a silly thread altogether.

[williat]

Then what is it actually being devalued against and what would be the purpose of intentionally devaluing a currency?

It makes your goods more attractive on the market, others can purchase more for less. If country A devalues their currency, country B's currency rate doesn't move up or down, it solely means that less of B's currency needs to be used to purchase 1 unit of A's currency.

That's the point I'm trying to make. Currency stability is based on both internal and external factors, and you can't talk about one without the other.

Of course not but I don't believe this has anything to do with importance. Domestic stability is vital, think of it in terns of a risk perspective.

So definately domestic stability is whats important.

Agreed.

[Pliny]

To answer your question you need to look at what deflation and inflation really are. Theyre based on the size of your own economy. You either dont have enough government backed currency for the ammount of goods in the market place, or you have too much government backed currency for the ammount of goods.

Ideally you want to keep the purchase power of the dollar stable against a diverse basket of goods and services in your own economy. If you dont do this, then the currency because useless as tender for deals and contracts (especially long term ones) and you discourage economic activity.

So from what you are saying, if our aggregate production - the amount of goods - is really high they can create lots of currency so that prices and wages don't go down, and if our production is low they should try and decrease the amount of currency, or minimally not inflate the supply, so that prices and wages don't go up, thus keeping the purchase power of the dollar stable.

I see why a currency would become useless as tender for deals and contracts if the currency decreases in purchasing power but then what would be wrong with increasing it's purchasing power?

International deals on the other hand should be denominated in the most stable units possible, and often wont be based on your own currency anyways.

So definately domestic stability is whats important.

Not particularly true when you think that you buy your lettuce from California.

[Pliny]

That's the point I'm trying to make. Currency stability is based on both internal and external factors, and you can't talk about one without the other.

Also, there are lots of simple reasons to devalue your currency. Some popular ones are to encourage exports and to artificially reduce fixed-rate debt.

Devaluing a currency then does indeed make it less valuable, does it not? Another country devaluing theirs would mean ours is worth more against theirs and their exports to us.

Predictability is important to everyone. If it affects businesses, it can affect workers as well. Rapid/unexpected currency appreciation can run companies out of business and thousands out of their jobs.

True enough. Unpredictable variables that threaten the value of trade or security of trade tend to end trade.

[Pliny]

Then what is it actually being devalued against and what would be the purpose of intentionally devaluing a currency?

It makes your goods more attractive on the market, others can purchase more for less. If country A devalues their currency, country B's currency rate doesn't move up or down, it solely means that less of B's currency needs to be used to purchase 1 unit of A's currency.

Moonbox said devaluing a currency didn't necessarily make ours more valuable. I think you are saying it does.

Of course not but I don't believe this has anything to do with importance. Domestic stability is vital, think of it in terns of a risk perspective.

Domestic stability is indeed vital if you want to trade internationally at all and international trade is vital to our standard of living. They are both important and dependent upon each other's stability. Trade with unstable economies invites disaster in you own.

Edited May 30, 2010 by Pliny

[dre]

So from what you are saying, if our aggregate production - the amount of goods - is really high they can create lots of currency so that prices and wages don't go down, and if our production is low they should try and decrease the amount of currency, or minimally not inflate the supply, so that prices and wages don't go up, thus keeping the purchase power of the dollar stable.

I see why a currency would become useless as tender for deals and contracts if the currency decreases in purchasing power but then what would be wrong with increasing it's purchasing power?

Not particularly true when you think that you buy your lettuce from California.

I see why a currency would become useless as tender for deals and contracts if the currency decreases in purchasing power but then what would be wrong with increasing it's purchasing power?

Same problem...

Lets say you sign a mortgage with your bank to buy a home. Youre making an agreement based on the purchasing power of the dollar at that time. If the value of the currency doubled during your term you would be surrendering twice as much wealth as you origionally agreed to.

Or lets say you want to hire an employee... sign him to a three year deal... if the dollar increases you are paying more in terms of real wealth than you agreed to.

How can you base anything but spot transations on a medium that you cant predict the value of for the duration of the deal. The more stable the units you base transactions are, the more transactions there will be.