Currency Valuation
- Started
- Last post
- 7 Responses
- 2002
For 74LEO
Currency Valuation (simple explanation)
There are three determining factors in currency valuation: demand, supply and monetary policy.
Demand:
In order for countries to buy or sell goods, they need to have foreign currency to exchange with the trading countries. China has massive amount of foreign currency reserve because they trading ratio is skewed to export. USA would need to purchase Chinese currency to pay for imports. Additionally, China is a growth market and investments flow in to the country with foreign currency which also needs to be exchanged to local currency. Cheaper the currency, easier to export (will be explained in monetary policy).Supply:
The value of a currency is determined by how much is floating in the global market and government. If government needs to borrow money, it will print more of it. More debt it acquires, more money is in the system. More in the system, less value it is. If you tighten the money supply, value of your currency goes up but that would decrease export because it would be more expensive for someone to exchange the money and import goods.Monetary Policy:
The supply is generally controlled by the central bank. It determines how much to print or buy back. Example, China has a very tight control over its valuation and it is not traded in open market (that is slowly changing). The value of it is kept at artificially low so it can export more. USA has adapted this strategy with weak dollar. This helps USA to export but loses egos of Americans. If a central banks needs to bail a country out or there are potential risk on default on debt, the currency would devalue on bases of speculation.Gold reserve base valuation is no longer relevant as USD is no longer pegged with gold standards.
- 20020
"Who and what backs the Euro?"
- The EU central bank and richest countries in the EU: Germany and France."Is it just a reflection of the current economic structure of all of Europe or each individual country?"
- It is a reflection of EU. Current economic structure is flawed. Same currency doesnt mean that there is a unified monetary policy. Individual countries sets their own and reports back to Euro Stat.
- drgs0
I disagree
- 20020
How could Greece and other countries borrow so much with virtually no stable or growth economies and devalue Euro?
Example, you are in a family and there are 5 members. 2 of them have great jobs, great credit and large amount saved up. Because there are few good member financially, you can borrow and get credit based on their credit rating as a member of the family. And it doesnt matter if you have a job, money or any collateral.
Greece being part of the Euro utilized credit rating of Germany / France and borrowed against that.
- Correct me if I'm wrong, but doesn't it have to do with what the country as a whole "accomplishes?"monospaced
- They don't produce much, there isn't a big industry, there's limited exports and an overall lazy culturemonospaced
- sounds like people who got mortgages when couldnt afford it?2002
- 20020
"Correct me if I'm wrong, but doesn't it have to do with what the country as a whole "accomplishes?""
That is the problem. When using common currency with separate fiscal policy, it does not work as a whole. Before Euro every country had its currency at different value. It was because different countries had their own policy on economy, how to spend and make money.
Euro equalizes everything in terms of value but it needs centralized fiscal policy that governs every country which no country wants.
The austerity measures are dictated by central EU and Greece does not want to abide by such stating the sovereignty. Sovereignty can not be a defense to debt when you spend money based on someone else's credit and not telling them about until you are about to default.
- 20020
Which thread you were planning to fap to?
- akrok0
you're flap request got denied based on your credit score. greece on the other hand gets to flap a lot. lol.
