Strong Currency

There is an automatic assumption that a strong currency (in particular against the USD) leads to a difficult exporting position because goods become ‘more expensive’ for other countries to buy, but – and certainly from an island perspective – our imports will generally get cheaper for dollar based commodities- so there are self balancing factors, borrowing also gets cheaper, although there is an asymmetry in Europe whereby only Germany seems to get that benefit.

Strong currency has often been the prevail of strong economies, buyers are naturally attracted to the currency and buy into it, for this reason the Venetian Ducat (a type of gold coin) was a standard in international markets for over 500 years from the late 13th century until the middle of the 19th century, this happened because the coin was never debased.

Debasement and re-minting were the metallurgical currency versions of monetarism today, if you wanted to increase the money supply you didn’t make a sanction to place more zero’s in somebody’s computer, instead you mixed lesser value metals with the coin of the realm.

The …

Read More

Competitive devaluation?

Anybody who follows the well known finance blog Credit Writedowns will know that one of the trends coming about (according to author Ed Harrison) is that we are going to see a competitive devaluation, where USD and Euro purposely look to go lower, the other alternative is that the Chinese opt to float their currency and allow some appreciation. This is happening right now, it is no coincidence that the Yuan is going to see some rule loosening, it is that or face the alternative which is a move by USD as low as it can go to re-establish equilibrium between the surplus/deficit nations.

While competitive devaluation is not the subject, it is touched on by several different facets of the conversation, well worth viewing.

Read More

Falling euro, friend or foe?

Many critics of the Eurozone are sceptical because they have always raised the fact that countries cannot devalue their currency, think twice would be my response, what is happening with the Euro is a large scale depreciation that means nobody has to leave the zone to get cheaper currency.

There is a race to the bottom happening in my opinion, the Chinese have definitely lead the way thus far with their Yuan manipulation, the only reason the world plays ball with them is due to their manufacturing output of cheap goods (which would be cheap compared to 1st world production costs even if Yuan traded at fair value) which we want and willingly buy.

Then you have the dollar, the US has such massive forward liabilities that the dollar will have no choice but to tank, the UK sterling doesn’t have a great future either, fifty years ago it was worth five dollars now it is at $1.43 – but currency is not absolute, it is relative – and that is why you have to look elsewhere to see what …

Read More