TECHfullyBREWED
Why governments devalue their currency?
TECHfullyBREWED
Publish date: Wed, 12 Aug 2015, 03:16 PM
TECHfullyBREWED
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The value of a currency is determined relative to the value of the other currencies i.e. how much of the other currency can be bought by one unit of your home currency. In general, this is the exchange rate of this currency pair and it fluctuates over time with currencies gaining or losing value against each other. When a currency reduces its value against other currencies, this process is called devaluation.
Devaluation is a natural process in the history of financial markets. All currencies witness their currency rates falling and rising and if 10 British pounds were able to buy, say, 20 U.S. dollars a year ago, today the pound could be devalued and its purchasing power would only be enough to buy only 15 dollars. In contrast to market devaluation, governments around the world sometimes resort to devaluation as a tool to protect their trade balances. Thus, the local currency is forcedly devalued and its currency rates against other major currencies is reduced while restrictions are often imposed preventing the home currency from being exchanged at higher rates.
These types of government intervention in the foreign exchange market are a perfect example of official devaluation while the natural market devaluation is often referred to as depreciation, a process when the currency rates fluctuate downwards. In both cases, the country whose currency is devaluated could benefit form the lower cost of its export of goods, which now are cheaper to buy by customers in ountries whose currencies are stronger. The history of trade recalls many examples of intentional devaluation with the purpose of conquering new markets through the lower currency rates of the devalued currency.
One of the biggest devaluation waves in history was in the 1930s when at least nine of the leading world economies devalued their national currencies, including Australia, France, Italy, Japan and the United States. During the Great Depression, all these nations decided to abandon the gold standard and to devalue their currencies by up to 40%, which helped revive their economies and stabilised currency rates.
Meanwhile, Germany, which lost the Great War a decade earlier, was burdened to pay strenuous war reparations and intentionally provoked a process of hyperinflation in the country. Thus, the Germans witnessed the biggest ever devaluation of their national currency and the currency rates hit rock bottom. At that time, the currency rate of the German mark to the U.S. dollar stood at several million or billion marks per dollar. On the other hand, this devaluation helped the German government in covering its debts to the war winners although the average Germans paid a disastrous price for this government policy.
The governments around the world are often tempted to lower unnaturally the currency rates in order to benefit from the lower value of the national currency. The lower currency value encourages exports and discourages imports improving the country’s trade deficit and imbalances. However, the average citizen of a country with a recently devalued currency could suffer from higher prices of imported goods and overseas holiday costs.
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Discussions
Be the first to like this. Showing 12 of 12 comments
then can we say our current ringgit depreciation is blessing in disguise, or we shall view it at different perspective?
2015-08-13 08:38
paper, you want my answer you have to give me your answer first, you want to save yourself you also must save other people, you must do the things to save yourself and to save others. The things that are beneficial for you and others. You have no contribution you have no blessings, this has nothing to do with whether current ringgit depreciation or not? No money no talk what, simple logic, whether the ringgit depreciate or appreciate, it does not make a difference to people who has no money or no contribution. Right, what is your contribution to people for today, you want blessing, you want to drink teh talih, you pay for it what, what has your blessing got to do with the current ringgit depreciation, you have to start contributing yourself for the good of other people now and yourself later on, this is nature's law.
2015-08-13 08:52
someone is smoking something here...devalued currency won't cause inflation ! LOL.
2015-08-13 09:28
Supply and Demand, if demand drops price also drops due to weakening consumer power, we have deflation instead of inflation. This is what is happening to Japan before and the US not long ago. By the way, somebody has a smoking mouth. People also has the choice to adjust their spending habits to less expensive goods.
The good news: There is a difference between the quality of life and the quantity of life, now that we have a devalued currency, our quality of life might even become better but the quantity of life will have to be cut down.
More money to spend is the same as more money to eat, you are not going to become more healthy by eating more food than you need. By being more healthy we will be more happy in the future. This is how Warren Buffett predicts that the stock market index will be even higher in the future for the US stock market.
Dude, do you get it? When you are more healthy, you have more strength to run faster and move higher in life. Have less money to spend or eating less temporary is not always a bad thing after all!!!! Cut down excess spending or slags is to be more efficient in the future do you get it!!!! The local market will become more thin and more efficient in the future, this is not a bad thing after all. For a person, you want him to grow thin and grow tall, not fat and plump, do you understand my analogy for you or not?
2015-08-13 10:27
Wrong statement at the opening. Currencies are not valued based on other currencies!
Currency is issued according to assets that were produced.
These assets exists and continue to generate value and wealth, and the circulating money is backed by the value of the continuously generated wealth. If the asset evaporate and generate less new wealth, the circulating money will devalue.
That's about it!
ref from 259trillionvs5trillion.com
2015-08-13 12:21
@Kian Depreciation of Ringgit is widening the gap of expenditure in relative to the inflation in our country. How is this a good thing when your purchasing power is exponentially reducing? Why is bank negara not coming out with any plans to save the currency? Or are they aiming for lower future debts?
2015-08-13 12:23
JeevS: there is a good and bad together, the bad is to help you to make improvement or to become more productive. The good is supporting you so you don't fall down while you make changes for improvement. The reality is the devaluing currency, it is better for the bank negara to not to do anything to try to change the reality. I would be scared if the bank negara tries to do something. We have to be fair to everyone, that is why there is always a good and bad together. In short, the devaluing currency is reality, you can not change in a short time. There are two things you can change: your performance and contribution.
If your performance attained through changing yourself such as lowering your debts and cost of operation to become more productive, this is your own responsibility. The contribution is your task you need to do for other people for you to be worthy of enjoying your lives. Don't you think it will be funny when you can keep on taking on debts forever so you get to enjoy your lives forever without even have to think about your contribution (what is more valuable or more important)to the society. Don't you even think that this is funny?
The devaluing currency is God's hands to make you more productive and contribute more to society. You don't have to worry if you abide by God's rule and live marginally. Spend only after you are sure you are going to have that much money for sure in the future, remember this, before you spend your money next time, you will be fine.
Focus on your strength for the things you want to do for other people your contribution so that you will not get poor results or poor reception from people. Use simple way to solve difficult problem, you don't have to spend RM5 million on a house just to use it for you and your girl friend to live in it, this is wasteful and unproductive. I hope you see what I mean, but think for yourself also.
2015-08-13 13:02
Goodcompanies, the key word in the opening statement is "relative'.
For example,consider a currency of particular nation whose assets continue to generate value and grow wealth positively but not as greatly as another nations relative growth.
2015-08-13 14:30
Fractional Banking system is another factor that distorts the basic theories of currency valuation.
This system allows banks to give out loans that are only fractionally backed.
Consider the valuation outcome, if these loans are used to purchase foreign currency.
2015-08-13 14:54
he steep decline in the value of the ringgit is not bad news for everyone.
Winners and losers from weaker ringgit:
WINNER:
Export-oriented sectors such as:
rubber product manufacturers+
semiconductor firms +
furniture producers+
are prime beneficiaries because their production costs are mainly in ringgit while sales are in US dollars.
Nevertheless, analysts cautioned investors because the benefits of the weak ringgit for rubber sector had been priced in.
LOSSER:
The losers of the weaker ringgit are companies which import their raw materials in US dollars but sell the products in ringgit, and those with exposure to US dollar debt.
Auto-
The stronger US dollar will have a negative impact on certain players, such as UMW Holdings Bhd and Tan Chong Motor Holdings Bhd.
Aviation-
players are at risk because of the borrowings in US dollars to fund the aircraft and parts.
AirAsia Bhd, 80% of its debt is exposed to the greenback.
Telecommunication-
About 22% of Telekom Malaysia Bhd’s borrowings as of the first quarter were in US dollars, while Maxis Bhd’s and Axiata Group Bhd’s exposure to US dollar debt was at 32% and 44%, respectively
TV-
Weaker ringgit is also negative for Astro Malaysia Holdings Bhd, as about 70% of its content cost is in US dollars, while the receipts are in ringgit
2015-08-13 15:13
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Devaluing currency lowers future debts. If you have a strong currency, we tend to spend and spend and never stop spending. Now, the devaluing currency is helping us to stop our spending habit, whether we like it or not. The bad news is life may become tougher for some people to cope without spending money, but the good news is, we are going to get a better quality debts servicing ability in the future. That is all, don't tie the devaluing currency to politics or what, this is reality, it has to happen before you spend more than what we are able to make in our whole life in a single big gamble. This is the new reality we have to face, have confidence in yourself,if you are not that heavily borrowed or are not so much in debts. Now, if some companies with low debts or borrowings are also taken a hit from the current stock market slide, this is a good time to buy this type of companies, those with low debts. They are not going to sink because they have low debts, whether devalued currency or not. But productivity is going to increase for them because of the devalued currency making their products more competitive. Or, this forces some companies to be more efficent in their operations, and there are fewer company failures in the future. This is new reality, don't worry about it! Devalued currency spend less, inflation won't go up lah!
2015-08-13 06:57