Monetary depreciation :

Monetary depreciation : Introduction: In order to understand the phenomenon of currency depreciation, we must first understand the utility of the currency. A currency is defined by three things: -Unit Account / Reserve value / Intermediate exchanges. This allows information and computing economy by simplifying the price system. It serves, first, to assess the price of all goods. It is a unit of account used to measure the value of heterogeneous goods. It is a social consensus, a belief that gives value to money. Money is a directly exchangeable good, and allows getting any product or service. Most economies are said monetary, to the extent that the products are not exchanged against other products, but by money. Finally, money is a store of value, a form of wealth or assets and liabilities, which has the particularity to be both preserved and remain in cash. This means being able to keep its value while being used to exchange goods and services. Currency is therefore a fixed value in order to regulate the exchange. Especially international exchanges of currencies, which do not have the same value, and should be regulated by the exchange rate. This is called a fixed exchange rate to a major currency like the Euro or Dollar for example. The exchange rate fluctuates according to supply and demand for each of the currencies. It cannot be changed by devaluation or depreciation of its currency by the state issuing the currency. We can see then that the causes and reasons for the state to depreciate its currency are multiple. Definition: Currency depreciation is the fact for a currency to lose value relative to property. It is necessary to have more money to acquire the same property. It is therefore a loss of purchasing power. It also describes the loss in value of one currency in relation to others. This is called devaluation or discount. This phenomenon is caused by inflation. Indeed, inflation is due to high money supply making it lose value to money. This is the case when the country is in a growth phase, interest rates are low, allowing a significant injection of money into the economy. Currency depreciation is then due to the increase in the number of units outstanding .This can also be a political will; indeed, a country may voluntarily choose to have a weak currency to boost his exports, but May also, generating an increase in the price of imported products Currency depreciation may also be due to a currency change will on the part of the country. All countries have experienced at least once in their history of such depreciation. It was the case with the coins that was gradually losing value to be replaced later by another currency. The new currency could then take the name of the old or have a new name. To ensure the conversion of one currency relative to another, States must have very high change reserves. But if the demand on foreign currency is higher than demand in the local currency, foreign currency reserves fall rapidly and the state was forced to stop the conversion of the national currency in foreign currency. In practice, devaluations are placed in a preventive setting, the currency is devalued while before the conversion is become impossible. I What is money and what is it used? Money is primarily a story of trust. It passes from hand to hand in notes or coins, an inscription on a check, or a transaction order with a card or by internet, money is a trusted link inside the market and that?s makes it work. The currency has several dimensions:First, it is a private good, in the sense that, like other goods, is the subject of an offer and demand, and his detention have a price. It is also a public good because his availability, circulation and preservation of his value are essential to the well-functioning of trade. There is also a notion of rivalry in the currency. The amount of money that a person has is his exclusively, and depriving others of its use as long as it does not spend it.It is an instrument of political power. Indeed, once the currency received support (metal or paper) all forms of government have left their mark on it to make it a tool of power.Finally, it is a social good, because his use depends on the support of all and the confidence of all his users. (The more there are people in the \"club\" of users of the currency, the more it is accepted). That is why there is a wide gap between its exchange value and its support. (A banknote costs only pennies to fabricate some) same with credit cards, which work only because they are accepted by merchants.The currency has gradually dematerialized keeping the same attributes as it has managed to preserve the trust of its users. The currency is above all a matter of trust. (Source Alternatives Economiques HS : 105 Avril 2015) The role of Banks : Since money is so powerful, it is important to know who controls it. Nowadays the total money supply is 90% of bank money, which means a simple writing on a bank account, which flows through various means of payment (ex : cards, transfers, checks, etc. ... ) and only 10% of currency in circulation (banknotes and coins).But the first scriptural money creators are banks. They proceed as follows: For a set of scriptures, they create money on loans it grants, or by monetizing assets that are not (a building, an obligation created by a company, etc. ...) Customers therefore find themselves with an additional amount of currency.This power has limits, in fact each bank has to follow certain rules, such as sufficient funds to hold that customers can withdraw money regularly. Furthermore, they are accountable to the ECB (European Central Bank) on the amounts lent. Banks therefore turning credited with much money, that money capital. II Depreciation effects: A) Positive effects: A country with a deficit must necessarily convert its national currency for the amount of the deficit in order to resolve what it owes to its trading partners. On the foreign exchange market, this operation helps to increase the supply of its currency in relation to the request that is made. Its price, that is to say, its exchange rate therefore decreases.14814551142365Trade Balance 00Trade Balance 1022985314325Exceed 020000Exceed 319595429845000174815429845000 19672301460500 19672302736850018516606985Depreciation 020000Depreciation 429958590170Time 020000Time 1384935876300 0200000 174815521843900 367093556515Volume effect 020000Volume effect 1965960293370Price effect 020000Price effect 1080135290830Deficit 020000Deficit First, it follows a price effect: the trade deficit widens as imports are more expensive and economic agents do not react immediately to this price increase. But in a second step, a volume effect appears: as the same volume of imported goods is more expensive than before, resident?s agents are encouraged to substitute local goods to foreign goods; this helps to reduce imports. On the other hand, the decline in the exchange rate makes domestic goods cheaper to overseas. Exports are stimulated. This allows greater freedom in the implementation of economic policies; In a system of fixed exchange rates, each country must seek a balance with the outside because any deficit puts downward pressure on the value of the currency of the deficit country, which puts into question the fixed parity of currencies. Thus, the outflow of currency-related trade deficit must be offset by capital inflows attracted by high interest rates. This results in the inability of countries subject to the external constraint to act independently on the level of interest rates. In the system of floating exchange rates, governments no longer have to worry about the parity of their currency. They can more easily lead an autonomous economic policy taking account only of internal considerations. Nothing prevents, for example, a country to reduce its interest rate to facilitate the resumption of investment. However, in the spirit of the monetarists, the advantage of this system is to help in the fight against inflation through greater control of the money supply. It limits the manipulation and speculation on exchange rates, leaving market forces determine the exchange rate. In other words, it removes the possibility for a State to overvalue or undervalue its currency. Moreover, in a system of floating exchange rates, central banks are no longer obliged to intervene to maintain parity of their currency. Foreign exchange reserves to defend the currency on the foreign exchange market are then useless; many currencies thus become available to finance productive activities. I52 Entérinés par s acords de la Jamaïque en 1976, les changes flottants s B) Negative effects : Devaluation create destabilizing effects on foreign trade; When exchange rates are fluctuating, it is not possible to know precisely the interest that a foreign investment, nor a commercial operation when it is set to run. This uncertainty slows world trade and increases their cost by setting up contracts to protect against exposure to fluctuations in exchange rates. Exchange rate fluctuations are not neutral; they are reflected first on the prices of goods and services. Indeed, depreciation increases the cost of imports; gold, many of them are essential and are not interchangeable. This therefore causes inflationary. It follows that the exports themselves are not necessarily driven by the decline in the exchange rate, especially when they include imported products. A deficit therefore does not automatically absorbed by the flexibility of exchange rates; it may even dig through the vicious circle of currency depreciation. Indeed, inflation leading to a mistrust of the currency, many traders in the foreign exchange market will want to dodge. Speculative behavior is favored by fluctuations in exchange rates. Indeed, today most transactions in the foreign exchange market are independent financial flows of trade in goods and services, many operators are playing against each currency other. The system of floating exchange rates therefore penalizes the establishment of autonomous monetary policies. In order to avoid capital flight and speculation down on its currency, each country has to follow the level of other interest rates. Economic globalization has led to the requirement for the most open countries and subjected to external stress of trying to have an appreciated currency on the foreign exchange market, so strong money. III Can we devalue without devaluing? To overcome the crisis, some countries are engaged in a real \"currency war\", also known as competitive devaluation. Some countries like Japan devalue their currencies to boost their exports. Yet they are accused of unfair competition because other, like the users of the euro, can?t do the same, because of the restrictions of the single currency. In the case of Europe, we see that the economic crisis has updated many flaws in the single currency. Capital flows excesses have accentuated the imbalances between countries and Member States can not conduct external devaluation, as the Euro operates under a fixed exchange rate regime, are forced to individually reduce their external deficit. The European Central Bank then asked to countries to be readjusted on deflation or internal devaluation (Decline of prices and wages). This process does not please everyone and is controversial. Already because these processes don?t work in period of crisis, but also in case of a country who don?t success in i twill be forced to return into a system of flexible exchange rates, and therefore, get out of the Euro. Some countries are affected by what is called the Boom & Bust cycle. This is a sharp rise of the economy, characterized by higher growth rates and inflation, including wages, creating bubbles that eventually burst, or investors lose their money and people lose their jobs. The deficit is widening and it is then necessary to reassess the real effective exchange rate. (Eg Ireland, Latvia, 2007) The problem is that, within a monetary union, the adjustments between countries can?t be done through the exchange rate. The solution is to influence prices by internal devaluation. The states, which have no direct influence on the currency, have to rely on the decline in wages and prices and the implementation of reforms to move the capital for investment in the areas where they are required. These methods quickly reach their limits. It turns out that wages fall too much in the public sector, and prices will remain too high. This imbalance will result in the impoverishment of households that do not restore competitiveness, and the decline of domestic demand creates imbalances in the trade balance of each country, resulting recession. In terms of the external devaluation, Argentina's attempted adjustment by deflation in 1998, but his situation is then rapidly degraded until 2001. The Argentine dropped its idea of ??\"currency board\" that gave a fixed exchange rate like in the euro area, then sharply devalued its currency. These choices are proving costly in the short term, as a contraction of GDP in 2002 followed by a spike in prices. (+ 26% average) but the effects wear off next yearwith a GDP growth and higher prices more stable. In the end, even if inflation mitigated the effects of depreciation, the price decline has been felt and the country was changing its exchange rate accordingly. (Argentinean Peso was worth only 0.25 Dollar) The trade balance had returned to surplus. Finally; external devaluation is a radical solution that works only because the state controls its currency, but also because developing countries like Argentina have a strong growth potential. This solution is not applicable to the Euro, because its too expensive and vulnerable to the short-term disastrous effects. Internal devaluation is seen by its users as a way to restore competitiveness and public finances. Yet these objectives are largely contradictory. In a context of deterioration of, public accounts, due to the rescue of the financial system, the fall in household purchasing power, results in lower tax revenues and higher public spending. Public debts explode. Affected countries are forced to ask for help, making them dependent on external public financing.The other devious effect of devaluation is the impoverishment of the population. Excessive unemployment is responsible, to the extent that migration balance is sometimes reversed, as was the case of Iceland in 2009.Yet the external devaluation is a more effective way that the internal devaluation to eliminate imbalances. However, it is not possible within a monetary union. It remains in the euro, the solution of the internal devaluation, which is slow and expensive. Moreover, this strategy will be more difficult to implement because of the existing imbalances, like the situation in Greece, and European countries must guide their policy to accelerate that process. For example, higher inflation in the surplus countries like Germany would better price adjustment. In addition, the vote of a European budget would have more control over capital and would direct them where they are needed. Source : Problèmes économiques 03/2013 Peut on dévaluer sans dévaluer ? IV The Currency war: After the outbreak of the global economic and financial crisis, major central banks and governments have tried by all means to find an appropriate solution. The first step was the implementation of emergency measures to rescue banks. Represented by the launch of the ultra-expansive monetary policy ever seen, with quantitative easing and the appeal without limit to public debt. All that remained without real success; we went back in a second step, for countries to use sanctions and protectionist measures. Inevitably now begins a third stage, devaluation and currency warfare http://la-chronique-agora.com/devaluation-guerre-monnaies/ What is it ? The \"currency war\" is the battle between the countries over the world to be as competitive as possible, through economic policies, including monetary allowing them to lower the level of their national currency against other currencies. In reality, this is to practice what is known as a competitive devaluation.The goal of this \"war\" is to have a weak currency relative to others, because a weak currency relative to other promotes exports of a country. On the other hand, imports become more expensive, which encouraged households to consume \"home\", but more expensive, because the devaluation is a form of protectionism. In the end, the domestic industry is doped, a virtuous circle of economic growth, consumption, employment and ultimately public revenue.This devaluation is actually the source of international conflict, because devaluation can?t be made by sparing others. A country that devalues ??its currency unilaterally and significantly strengthens its economy at the expense of employment in other countries. This creates an imbalance in world trade that denounces these other countries tempted to do the same. If everyone devalues ??so, it cancels the positive effects of devaluation, and it remains so that the disadvantages of such a maneuver, namely the massive monetary creation resulting in a global rise in prices. But the uncontrollable inflation has become a phobia for the economy. History has proven that the massive inflation pushes social revolt, even more than unemployment and can go even further. Some countries are keeping their currencies relatively low despite good economic health; like China with its yuan, which the State controls. This is the case in other Asian economic places like Hong Kong or Singapore. Also included in the list of countries that operate for their currency does not strengthen too much, like the oil producing countries and gas, such as Saudi Arabia and Russia. In another development, Switzerland, with his frank highly sought because very safe, does not hesitate to openly intervene to protect its economy. The case of the European Union with the Euro and the United States is somewhat special. http://bourse.lefigaro.fr/devises-matieres-premieres/actu-conseils/comprendre-la-guerre-des-monnaies-365342 B) The omnipotence of dollar : The United States also manipulate their currency, much as they can. They make sure to maintain a relatively weak dollar to support their own growth, and hence the rest of the world. The United States dominated the international monetary system for about 100 years. Even after the end of the Bretton Woods system and the crisis could dethrone removes. The dollar remains the reference currency in about 44% of global transactions (Euro is only second with 17%) The Dollar also serves as a unit of account upon invoicing of international trade. The United States is probably the only state able to trade exclusively in their own currency. The Federal reserve injected massive amounts of dollars into the economy by maintaining a near-zero interest rates, to continuously infuse investment, employment and consumption of Americans. This allows the US to live beyond their means, with its colossal public deficits and debt, which continue to widen dangerously. In addition the countries that wish to have a currency unit shall count as tracing the movements of their exchange rate to one international currency. One study found that 50% of countries have chosen the Dollar, against 30% for the Euro. The Dollar appears as a dominant currency, this is known as \"global currency\" A strong currency is defined as the number to services it provides to its users. Dollar answers to all these services, that is why it has the nickname dominant currency. First, it serves as way of payment. It allows purchasing goods and services anywhere in the world. It serves businesses and banks to prepare their international commercial or financial contracts. It is also the way of payment for a central bank when it needs to buy other currencies to act on the foreign exchange market.Second, it is a unit of account. A currency in which we express the prices of goods and services exchanged. For a central bank is the currency against which it wants to stall the evolution of the exchange rate of its national currency.Third, it is a store of value. It allows investments and power to reap the benefits. The dollar is the reference currency, through which investors and international banks place their resources. This puts the dollar in the heart of public and private strategies. The dollar also remains the favorite currency of investors.Finally, each authority is in synergy with the others, which consolidate, and hinders the will for another currency to take the dominant place. Dollar remains today the only key currency of the international monetary system. It dominates by its number of users and the number of functions it performs. The Euro is only secondary and far. Yet the dollar sees on the horizon the Chinese currency (Present in 2% of international trade for now) but could internationalization high speed, only to take his place. C) How to exit Currency war ? Like all wars, the war of currencies, based primarily on attacks and riposts. Every country wants a significant advantage while eliminating competitors, and nobody wants to let it go. This desire for economic domination arises from current geopolitical realities, which shows that money plays a political role, and that competitiveness adversely affect international economic relations. This situation is in contradiction with the spirit of market liberalization, which had convergent aims. The first solution would be to return to gold standars of the nineteenth century. It is a monetary system in which the unit of account or monetary standard is a fixed weight of gold. It would prohibit a state to create money arbitrarily without counterpart in gold. This system would ensure allocative efficiency and financial stability. We know that the freedom of movement of capital creates booms and sudden drying up in some areas. The gold-based systems generate less inflation, less price volatility and fewer financial crises. Another solution, the creation of a new currency, more in line with current economic realities, a single global currency, because there is no viable substitute for the dollar today. This would remove the uncertainties related to foreign exchange risk, and makes obsolete the need to devalue its currency to remain competitive. This will result in the end to monetary peace. Of course, countries like the US and China are fiercely opposed to this project. The single world currency remains for the moment an utopia, but the Euro is actually a step towards this project Anyway, the world is changing, capitalism has evolved and diversified. The dollar, although it remains dominant begins to weaken, notably through the emergence of new competitors, such as the euro, a currency that has proven its stability in time of crisis, and potentially able to be replaced dollar and the rise of China, challengehis supremacy. The relations and international trade are now multipolar, so it makes sense that financial institutions are moving in this direction. Source : Alternatives economiques HS n°105 La monnaie et ses mystères V Should we leave the Euro? A) The creation of Euro: The Euro is first of all the result of a compromise between national interests. But the crisis has revealed many of the single currency design flaws. First a single currency cannot function properly without fiscal and political integration. Between those who wish to give up and those who think it is necessary to improve it, the opinions about the Euro divide. The signing of the Treaty of Rome in 1957 allowed the union of countries to be in within a common market system and allowed the various European economies to integrate at the level of trade. This had the effect of accentuating the instabilities due to exchange rates and disrupts trade. Formerly currency stability was organized by the Bretton Woods system, which linked all currencies the dollar and the dollar to gold, but the weaknesses of this system have germinated the project of a European common currency. A first project born in 1970 but faces inflation and monetary instability caused by the collapse of Bretton Woods and the oil shock that followed and finally fall. The project came in 1979 to the nine EEC member states (European Economic Community), which aims to stabilize the European currencies around a central rate, the ECU a unit of account created from a basket of currencies European. In 1992 the establishment of the \"four freedoms\" (free movement of goods, services, people and capital), is to facilitate the EU's trade with the rest of the world, by prohibiting such devaluations that disrupt competition and by ending currency crises. Soon after, the Maastricht Treaty was signed, creating the Economic and Monetary Union (EMU). Germany recently reunified (1989 fall of the Berlin Wall) wants to team up with Europe, and under pressure from France, agrees the single currency. However, it sets conditions, namely that monetary policy takes precedence over the others, and sets up railings, including the Stability Pact which allows a maximum budget deficit of 3% of GDP, so it did not to pay for the overspending of its European partners. The resulting consequence of this was the creation of a monetary union with a single monetary policy for a group of countries with very different economic situations. The Euro is not conducive to economic convergence, but instead causes a strong divergence between them, because the low interest rate caused a surge in demand and a rise in inflation in some countries (ex : Greece, Spain , Italy) B) The Euro, a currency without government: The case of The Euro is a bit particular. History shows has every sovereign government have always his own currency. This is also often the first decision of the new nations. They create a new currency and impose it throughout their territory. There is a very strong proximity between a state and its currency. The currency needs the government and vice versa. The government earns interest necessary to monetary confidence and organizes it. In return, he needs this money to have access to material resources (ex: Army) Gold Euro break this rule. This is a common currency shared by independent and autonomous political body.For this reason, some economists think that Euro is a faulty and incomplete currency. This currency without sovereignty would be at the origin of the Euro crisis. The unity of this monetary policy is challenged by unequal economic situations of countries. This is due to the fact that the political interests of nations diverge too much not to exceed the requirements of the Euro. A classic sovereign government would adapt its monetary policy to its overall policy; Members of the European Union must follow decisions voted in order to satisfy the greatest number. But the economic visions of some are not the same and Euro suffers from lack of solidarity of the Member States.Following the negotiations on the creation of the euro, it was decided that the European central bank is modeled on the German model. But this specific model to Germany the result of decisions taken at national level (ex: the independence of the Bundesbank) in addition, the German economic history is punctuated by crisis and redesigns specific to Germany. The error was to extend to the whole system of the euro area. If Germany is doing so well economically, it is because the European monetary system is a copy of its own economic system and policy. She familiarized longer than others to this system, today is why we say that Europe's reindeer are held by Germany. C) The benefits of the single currency: We have shown that the euro is more disabling than beneficial. But yet, the single currency has certain advantages: A microeconomic advantage, the single currency eliminates transaction costs and exchange rate strengthens the stability of the exchange rate. It encourages the exchange of goods and services and facilitates investment in other countries of the Eurozone. In addition, it increases price transparency, which increases competition.A microeconomic advantage, coordination of monetary policies restricted the export of the problem by the devaluation. The Euro is a currency of solidarity. It prevents the divergence of currencies and the volatility of capital. It is impossible for a Member State to dissociate himself from the other by devaluing its currency to reduce the damage of the global economic situation to the detriment of its partners.These advantages come at a price, the loss of an essential instrument of power, money, which must adapt to face with crises. If countries were homogeneous, this would not be a problem, but yet it is not the case, and differences of interest arise, in fact, when a country needs an expansionary monetary policy, another requires tightening credit policy.Financial markets have joined the Euro in the same way for all countries t interest rates converged, all States have borrowed at the same conditions; whether Greeks or Germans. But the country does not have the same solvency and when the economic crisis hit, it turned into political crisis and a gap has widened between the northern and southern countries. They saw \"anti-euro\" movements born. So, in theory, the union of all Member States are interdependent but in truth, European leaders have let the situation deteriorate in Greece, refusing to admit its insolvency. Even today she doubts on its place within the EU and wonders whether she should abandon the single currency. D) Should we leave the Single Currency? Economic situation in Greece is the worst example of the drawbacks of the Euro. It highlights its limitations and weaknesses. Other countries are approaching a lesser extent of this situation, like Spain and Italy. All now question the single currency. The loss of confidence in the Euro would mean the end of Europe. Given the current situation, it would be wise to leave the Euro? \"Yes\", answer some:It is now proven, the Member States are too different to share the same currency. The Euro have too many weaknesses; It is not linked to a sovereign state, but at a meeting of governments, taking collective decisions and compromises that aim behind their national interest. The euro was an incomplete currency. It needs an economic unit and a European solidarity to function properly, something that the Europeans are not willing to do, or even to hear about it. This example implies that successful countries should allocate their surpluses to countries in difficulty to balance the scales. That would be irresponsible and unfair. The most affected countries hear voices rise against the Euro, and ask for leave it, turn their monetary autonomy and get them the option of devaluation. This will allow them, thanks to the devaluation to restore competitiveness without restricting domestic demand, which will boost their economies. Thus, it will also create opportunities for countries wishing to invest, such as France. In addition, this devaluation will benefit from lower prices on products for import, while increasing competitiveness against the dollar. \"No\", answering other:True, the euro flaws, but it is naive to believe that these problems of inequality will be resolved by destroying the euro. The return of national currencies may radicalize the country who will all try to stand out of the crisis, including conduct a competitive devaluation which will strengthen the economic war between European countries.We must repair the Euro, by reforming, for example, implement controls on the movement of capital, the borders of the euro area, since they are responsible for the credit bubble and inflationary growth emerged in the southern countries Europe, because of the equalization of interest rates. In addition, advanced solidarity from the European form of real convergence policies and to create a true European budget. Instead of create a strong state, ?the United States of Europe?, we must abandon the pooling of debt and let the possibility for states to bankruptcy. So relax monetary union, and give countries in difficulty the opportunity to go out to devalue its currency, become competitive again, and then return to the monetary union.However there is no risk-free output in Europe. It would create an insurance mechanism that would distribute funds to a country when it undergoes an economic crisis. This requires the creation of a common budget, but also further solidarity.Finally, the ultimate solution would be to create a European Government, the \"United States of Europe\" with a true power of democratic decision. But this requires making a transfer of sovereignty, which requires above all a political integration will.The miracle solution does not exist. Leave the euro or not, the arguments of both camps are relevant. All agree that the Euro have defaults, but Europe will have to make a choice between repair or abandon it because it will end soon cornered face this problem, its existence may be terminated by the output a member whose population would rise up against the austerity measures imposed and unemployment, as has almost happened in Greece, causing other members with him, making collapse the house of cards that is Europe . The loss of confidence of its members sign the end of Europe. However the European construction remains essential to make our egalitarian and more democratic societies, this should not be at the expense of some. Sources : http://fr.wikipedia.org/wiki/D%C3%A9pr%C3%A9ciation http://fr.wikipedia.org/wiki/D%C3%A9valuation http://fr.wikipedia.org/wiki/Taux_de_change http://www.trader-finance.fr/lexique-finance/definition-lettre-D/Depreciation-monetaire.html www.letudiant.fr/.../les-effets-des-fluctuations-des-taux-de-change-2605 La monnaie et ses mécanismes, Dominique Plihon. http://www.boursorama.com/actualites/la-depreciation-de-la-monnaie-peut-generer-de-l-inflation-estime-axa-im-731b02313d4d7ce3a013664770f60eab http://www.moneyweek.fr/20100736833/conseils/economies/devaluation-monnaie-rigueur-euro/