₦airaland Forum

3 Reasons Why Countries Devalue Their Currency
By ADAM HAYES Updated July 06, 2019
With a potential outbreak of a trade war between China and the US, talks of the Chinese using currency devaluation as a strategy have been rumbling. However, the volatility and risks involved may not make it worth it this time, as China has made recent efforts to stabilize and globalize the Yuan.

In the past, the Chinese denied it, but the second largest economy in the world has time and time again been accused of devaluing its currency in order to advantage its own economy, especially by Donald Trump. The ironic thing is that for many years, the United States government had been pressuring the Chinese to devalue the Yuan, arguing that it gave them an unfair advantage in international trade and kept their prices for capital and labor artificially low.


Ever since world currencies abandoned the gold standard and allowed their exchange rates to float freely against each other, there have been many currency devaluation events that have hurt not only the citizens of the country involved but have also rippled across the globe. If the fallout can be so widespread, why do countries devalue their currency?

KEY TAKEAWAYS
Currency devaluation involves taking measures to strategically lower the purchasing power of a nation's own currency.
Countries may pursue such a strategy to gain a competitive edge in global trade and reduce sovereign debt burdens.
Devaluation, however, can have unintended consequences that are self-defeating.
Devaluing Currency
It may seem counter-intuitive, but a strong currency is not necessarily in a nation's best interests. A weak domestic currency makes a nation's exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products. This improvement in the terms of trade generally translates into a lower current account deficit (or a greater current account surplus), higher employment, and faster GDP growth. The stimulative monetary policies that usually result in a weak currency also have a positive impact on the nation's capital and housing markets, which in turn boosts domestic consumption through the wealth effect.


It is worth noting that a strategic currency devaluation does not always work, and moreover may lead to a 'currency war' between nations. Competitive devaluation is a specific scenario in which one nation matches an abrupt national currency devaluation with another currency devaluation. In other words, one nation is matched by a currency devaluation of another. This occurs more frequently when both currencies have managed exchange-rate regimes rather than market-determined floating exchange rates. Even if a currency war does not break out, a country should be wary about the negatives of currency devaluation. Currency devaluation may lower productivity, since imports of capital equipment and machinery may become too expensive. Devaluation also significantly reduces the overseas purchasing power of a nation’s citizens.


Below, we look at the three top reasons why a country would pursue a policy of devaluation:

1. To Boost Exports
On a world market, goods from one country must compete with those from all other countries. Car makers in America must compete with car makers in Europe and Japan. If the value of the euro decreases against the dollar, the price of the cars sold by European manufacturers in America, in dollars, will be effectively less expensive than they were before. On the other hand, a more valuable currency make exports relatively more expensive for purchase in foreign markets.

In other words, exporters become more competitive in a global market. Exports are encouraged while imports are discouraged. There should be some caution, however, for two reasons. First, as the demand for a country's exported goods increases worldwide, the price will begin to rise, normalizing the initial effect of the devaluation. The second is that as other countries see this effect at work, they will be incentivized to devalue their own currencies in kind in a so-called "race to the bottom." This can lead to tit for tat currency wars and lead to unchecked inflation.

2. To Shrink Trade Deficits
Exports will increase and imports will decrease due to exports becoming cheaper and imports more expensive. This favors an improved balance of payments as exports increase and imports decrease, shrinking trade deficits. Persistent deficits are not uncommon today, with the United States and many other nations running persistent imbalances year after year. Economic theory, however, states that ongoing deficits are unsustainable in the long run and can lead to dangerous levels of debt which can cripple an economy. Devaluing the home currency can help correct balance of payments and reduce these deficits.


There is a potential downside to this rationale, however. Devaluation also increases the debt burden of foreign-denominated loans when priced in the home currency. This is a big problem for a developing country like India or Argentina which hold lots of dollar- and euro-denominated debt. These foreign debts become more difficult to service, reducing confidence among the people in their domestic currency.

3. To Reduce Sovereign Debt Burdens
A government may be incentivized to encourage a weak currency policy if it has a lot of government-issued sovereign debt to service on a regular basis. If debt payments are fixed, a weaker currency makes these payments effectively less expensive over time.

Take for example a government who has to pay $1 million each month in interest payments on its outstanding debts. But if that same $1 million of notional payments becomes less valuable, it will be easier to cover that interest. In our example, if the domestic currency is devalued to half of its initial value, the $1 million debt payment will only be worth $500,000 now.

Again, this tactic should be used with caution. As most countries around the globe have some debt outstanding in one form or another, a race to the bottom currency war could be initiated. This tactic will also fail if the country in question holds a large number of foreign bonds since it will make those interest payments relatively more costly.


The Bottom Line
Currency devaluations can be used by countries to achieve economic policy. Having a weaker currency relative to the rest of the world can help boost exports, shrink trade deficits and reduce the cost of interest payments on its outstanding government debts. There are, however, some negative effects of devaluations. They create uncertainty in global markets that can cause asset markets to fall or spur recessions. Countries might be tempted to enter a tit for tat currency war, devaluing their own currency back and forth in a race to the bottom. This can be a very dangerous and vicious cycle leading to much more harm than good.

Devaluing a currency, however, does not always lead to its intended benefits. Brazil is a case in point. The Brazilian real has plunged substantially since 2011, but the steep currency devaluation has been unable to offset other problems such as plunging crude oil and commodity prices, and a widening corruption scandal. As a result, the Brazilian economy has experienced sluggish growth.

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Related Terms
What Is Competitive Devaluation?
Competitive devaluation is a series of currency depreciation that nations resort to in tit-for-tat moves to gain an edge in international export markets. more
Trade War
A trade war arises when one country retaliates against another by raising import tariffs or placing other restrictions on the other country's imports. more
Understanding Devaluation, the Causes, and the Downsides.
Devaluation is the deliberate downward adjustment to the value of a country's currency relative to another currency, group of currencies, or standard. more
Beggar-Thy-Neighbor Definition
Beggar-thy-neighbor is a term for policies that a country enacts to address its economic woes that worsen the economic problems of other countries. more
What Is the Net Exports Formula?
A nation's net exports are the value of its total exports minus the value of its total imports. The figure also is called the balance of trade. more
Sovereign Risk
Sovereign risk is the risk that a foreign government will default on their bonds or impose foreign exchange regulations that harm FX contracts' value.

Source: Investopedia

erwinschro:
Again, One man's debts are another man's financial assets. It is the holders of the debt that suffer more than the debtors. When the US government inflates away its debt, it inflates away ALL dollar denominated debts. Think about it, if the dollar is devalued then this is fantastic news if you are owing dollars because it is easier to pay back your eurobond.

Not for nations that have payment deficit.
We still import more than we export.

RabbiDoracle:
Somehow, Yes. But countries can restructure their debts in a painful way.

But where the problem lies are with individuals in those economies that are debt based economy - those that use credit cards like the western countries. Their own will be x 10. Because as the rates on your debt increases, you enter into more debt and you go and use more debt to solve your problems. By so doing, you are in a debt spiral. And since these debts are backed by their houses or other assets, those assets get seized and force-sold. This will crash the asset prices the more.

True.
China will likely give out more dollar loans to debtor nations...in exchange for more strategic assets.

erwinschro:
The ball has to drop at some point. Credit functions in cycles, even the biggest most powerful countries can't just borrow in perpetuity there will always have to be a deleveraging at least once per century and this goes back to the beginning of money and civilization. They even used to cancel debts every 50 years in biblical times.

People are running to the dollar for safety not knowing that they may actually need safety from the dollar. When the US government needs money, it just borrows it into existence (like all countries do) and promises to pay it back + interest. If you borrow the first dollar into existence and promise to pay it back + interest, where do you get the second dollar? It has to also be borrowed into existence. The whole system can only work if the debts continue rising forever. Many people will argue that this is by design and its just how economies work. In reality, economies have only worked like this since Richard Nixon got rid of the gold standard 50 years ago. There is a 100% failure rate of fiat currencies throughout history, but never has the world's reserve currency been fiat.

The real crisis is that in those same 50 years the US has been operating with a trade deficit, buying more from the rest of the world than they have been selling and paying for these goods with US dollars that they borrowed into existence. This system doesn't collapse because countries don't actually convert their dollars back to their own currencies because it would cause them to appreciate and make their exports uncompetitive. So what do they do? They loan that same money they were paid for their goods right back to the US government by buying those same bonds! This is the true luxury of being a superpower.

Now inflation is high in the US and they are facing the classic issue. The level of inflation adjusted interest rates that is low enough to save debtors from bankruptcy is below the level required for creditors to hold the debt as a viable storehold of wealth, devaluation is the only option - in fact its an inevitability. I suggest you read (or watch) Principles for dealing with the changing world order by Ray Dalio the largest hedge fund manager in the world.

As RabbiDoracle has stated, there will actually be a wealth effect in emerging markets because compared to the rest of the world we hold comparatively fewer US government bonds

For debtors countries (in dollars), there case will likely be worse.

It would be interesting to see FCMB & WEMA merger. Would it not?

veecovee:
Thank you all for the condolences.

Sorry no dey heal wound but it get wetin it dey do.

May the Lord direct you all to the right investments IJN

Hope you are holding up well. God bless you sir.

Yoast:
So sorry my brother for your loss. May the soul of the departed continue to rest in peace. Amen.

Hope you are holding up well.
God bless you ��.

Page 6666

Expect Something Huge

Cultistupdate:
This is the full story
Remember I had warned u guys 10 days ago who are members to run from Abeokuta immediately.

https://www.nairaland.com/7034839/blackaxe-eiye-abeokuta-enter-night

Because that was when the clash started



https://www.youtube.com/watch?v=OdC9oranDZ0

The guy called @cultistupdate is a suspicious SARS person who might be involved in extrajudicial killing of innocent Nigerian youths...and then capture it on video and share it as cult attacks.

Cultistupdate2:
As the cult war between Blackaxe and Eiye intensifies in Shagamu Ogun state. Follow the story

https://www.nairaland.com/7049391/full-story-tommy-popular-area

The guy called @cultistupdate is a suspicious SARS person who might be involved in extrajudicial killing of innocent Nigerian youths...and then capture it on video and share it as cult attacks.

Cultistupdate:
This one is another war o. Not the Blackaxe vs Eiye this one is Blackaxe vs Buccaneer in Ijoko Ogun State.

So this is what happened.

The guy called @cultistupdate is a suspicious SARS person who might be involved in extrajudicial killing of innocent Nigerian youths...and then capture it on video and share it as cult attacks.

Vidamia:
This guy was just killed now a at IBD hotel junction ilaro Ogun state

The guy called @cultistupdate is a suspicious SARS person who might be involved in extrajudicial killing of innocent Nigerian youths...and then capture it on video and share it as cult attacks.

austinkenneth:
After these relaeases, It wouldn't be strange to see the price at N2.00

Let those who have the releases please share them with us.

locodemy:
There is one stock.This stock has really dealt with some top ogas here.Some went on exile till today because of what the stock did to them in the past.This stock lacks good corporate governance because of bad mgt.

This stock is set to deliver in price action but the results are nowhere to be found for over 2 yrs now due to the issue it's having with the regulators.

I am here to announce to our members to get ready for sharp rise.Infact the stock may deliver close to 500% if not more than.

With all these expressions, the stock is decoded.Soon we gonna see if I am right or wrong.

The cowboys at the helms of affairs are getting ready to take it to 1000%.

The Chinese probably killed two of them and retained one head in the freezer in order to frame up the other guy.

DropsMic:
Fun fact. Most African Countries first Japan et China get Train technology.. But today na them dey construct trains for us.

Africans didn't get the train technology.
European built some rail lines in Africa for transporting minerals and products

MERRY CHRISTMAS, MY PEOPLE

A few million shares I have in Nestlé is making me �

I am prepared to see elephant at around kilomina twenchy twenchy

77 million units bids now .

I just opened page 6500.
A small gifts for y'all

YES TO GOOD.

Shalalalalal

Hello everyone.

The market rain maker is now ready to start work.

He was lucky to have regained his sense. In some cases, he would sell his properties and give as special thanksgiving offering.

emmanuelewumi:
Imagine someone got a total severance package of about N40 million and had to ask his Pastor to pray over the sum and reveal the business he should invest in.

By the time he regained his sense after 18 months, he had sown seeds and given offering worth over N25 million into the kingdom's business.

Assuming he had been Investing before he was retired he would have known what to do with the money

Flash360:
Who fit borrow me 30million wey dem no need urgently, make I use am load something for market for 1 month, payable with 10% interest. use me as the collateral.

You think you are valuable? What is your value if you have to use yourself as collateral to borrow 30m?

locodemy:
Don't be too sentimental in oando.
You are a newbie in that stock.
The stock really dealt with top ogas you are seeing here.
If you bought at 3.00,you can bail out at 75% profit now and wait for another bargain junction that will come up.Another rally will come upon the release of accumulated results

Make him be top oga, too na.

MONITOR CRUDE OIL PRICE CLOSELY.

Good day my people.
How are we all doing?
We are going to make it.

The fuel to the bank prices is about to be increased.
Short term traders are about to smile.

The week is indicative of what is to be unleashed from next week.
Zenith is to close the register next week. And subsequently to mark down. Hmmm. This seems that there may be some dumping. Anticipation mode activated.
On GT, I do not expect them to match the zenith's declared dividend. This then means that many people might also dump GT in order to buy Zenith at a lower price. This may restrain Zenith's price from dropping drastically. Optimal zenith price after markdown may thus be at around 20 to 21.50 naira at the first instance and subsequent drop to 18 to 19.5 naira in about 4 weeks' time.

emmanuelewumi:
Your transaction history on CSCS online will show it if it happened, the date of the transaction, volume of shares and price

You can take it up with them by reporting to the authorities

Ok.
But if the account is blocked already, won't they have blocked the updating as well.

Another thing is if the rally in the market was orchestrated to benefit them only, then they could block others so that only selected traders were selling at that moment.
For example, if a PFA wanted to buy some stocks for their portfolio, their friends in the industry might get the info and then created a pseudo rally. They would only make a bull out of the required stocks. During the time, they would suspend high volume and high frequency traders. This would help their bull as well. After they were done with the dumping, they would remove the suspension for most people. But if they had special grudge against you, your own suspension may last a lifetime.
Also during a massive bear, similar thing could done.

debostar:
It seems that it is the only meristem that asks for KYC every year. Meristem used to be a good and professional stockbroking firm.Now they look for every opportunity to stop your account

It seems that they deliberately block high volume clients" accounts whenever there is a rally in the market...
They might sell your stocks at high price and later buy it back when there is a dip...behind your back.
Your account with them would show actual balance of stocks...but they are running things behind.
They would block your account under guise of frivolous excuses.