|
|
| Information |
|
|
An Evaluation of the Devaluation
A Minister of Finance is morally right to lie about a forthcoming devaluation and a woman has the right to lie about her age. This is the common wisdom. Rumours about a devaluation of the Macedonian Denar versus the major currencies were in the air during the last few weeks. Still, no government official had to lie. The market just did not believe it. The unofficial exchange rate stayed put at 27 MKD to the Deutschmark even as the devaluation was taking place. This is strange. Devaluation rumours are usually reflected in the street exchange rates. The MKD has held its turf against other currencies in the last three years. A devaluation seemed like a reasonable proposition - or was it? Why do governments devalue? They do it mainly to improve the balance of trade. A devaluation means that more local currency is needed to purchase imports and exporters get more local currency when they convert the export proceeds (the foreign exchange that they get for their exports). In other words: imports become more expensive - and exporters earn more money. This is supposed to discourage imports - and to encourage exports and, in turn, to reduce trade deficits. At least, this is the older, conventional thinking. A devaluation is supposed to improve the competitiveness of exporters in their foreign markets. They can even afford to reduce their prices in their export markets and to finance this reduction from the windfall profits that they get from the devaluation. In professional jargon we say that a devaluation "improves the terms of trade". But before we examine the question whether all this is true in the case of Macedonia - let us study a numerical example. Let us assume that we have a national economy with for types of products: Imported, Exported, Locally Produced Import Substitutes, Locally consumed Exportable Products. In an economy in equilibrium all four will be identically priced, let us say at 2700 Denars (= 100 DEM) each. When the exchange rate is 27 MKD/DM, the total consumption of these products will not be influenced by their price. Rather, considerations of quality, availability, customer service, market positioning, status symbols and so on will influence the consumption decision. But this will all change when the exchange rate is 31 MKD/DM following a devaluation. The Imported product will now be sold locally at 3100. The Importer will have to pay more MKD to get the same amount of DM that he needs to pay the foreign manufacturer of the product that he is importing. The Exported products will now fetch the exporter the same amount of income in foreign exchange. Yet, when converted to MKD - he will receive 400 MKD more than before the devaluation. He could use this money to increase his profits - or to reduce the price of his product in the foreign markets and sell more (which will also increase his profits). The Locally Produced Import Substitutes will benefit: they will still be priced at 2700 - while the competition (Imports) will have to increase the price to 3100 not to lose money! The local consumption of products which can, in principle, be exported - will go down. The exporter will prefer to export them and get more MKD for his foreign exchange earnings. These are the subtle mechanisms by which exports go up and imports go down following a devaluation. In Macedonia, the situation is less clear. There is a great component of imported raw materials in the exported industrial products. The price of this component will increase. The price of capital assets (machinery, technology, intellectual property, software) will also increase and make it more difficult for local businesses to invest in their future. Still, it is safe to say that the overall effect of the devaluation will favour exporters and exports and reduce imports marginally. Unfortunately, most of the imports are indispensable at any price (inelastic demand curve): raw materials, capital assets, credits, even cars. People buy cars not only to drive them - but also in order to preserve the value of their money. Cars in Macedonia are a commodity and a store of value and these functions are difficult to substitute. But this is all in an idealized country which really exists nowhere. In reality, devaluation tends to increase inflation (=the general price level) and thus have an adverse macro-economic effect. Six mechanisms operate immediately following a devaluation:
Certain countries tried to contain such wage pressures and the wage driven inflation which is a result of wage increases. The government, employee trade unions and representatives of employers' unions - sign "economic pacts or package deals". The government undertakes not to raise fees for public services, the employers agree not to fire people or not to reduce wages and employee trade unions agree not to demand wage hikes and not to strike. Such economic pacts have been very successful in stabilizing inflation in many countries, from Israel to Argentina. Still, some of the devaluation inevitably seeps into the wages. The government can effectively control only such employees as are in its direct employment. It cannot dictate to the private sector.
Arguably, the worst effect of a devaluation is the psychological one. Macedonia has succeeded where many other countries failed: it created an atmosphere of macro-economic stability. It is a fact that the differential between the official and non-official exchange rates was very small (about 3.5%). This was a sign of trust in the macro-economic management. This devaluation had the effects of drugs: it could prove stimulating to the economic body in the short term - but it might be harmful to it in the longer term. These risks are worth taking under two conditions:
If so, why didn't it happen in Israel, Argentina, Chile and tens of other countries? In all these countries, the government announced inflation and devaluation targets well in advance. Surprisingly, it had the following effects:
That strict measures are taken to prevent the metamorphosis of the devaluation into inflation. The usual measures include a freeze on all wages, a reduction of the budget deficit, even temporary anti-import protective barriers to defend the local industries and to reduce inflationary pressures. Granted, the government of Macedonia and its Central Bank are not entirely autonomous in setting the economic priorities and in deciding which measures to adopt and to what extent. They have to attune themselves to "advice" (not to say dictates or conditions) given by the likes of the IMF. If they fail to do so, the IMF and the World Bank will cut Macedonia off the bloodlines of international credits. The situation is, at times, very close to coercion. Still, Macedonia could use successful examples in other countries to argue its case. It could have made this devaluation a turning point for the economy. It could have reached a nationwide consensus to work towards a better economic future within a national "Economic Agenda". It is still not to late to do so. A devaluation should be an essential part of any economic program. It could still be the cornerstone in an export driven, employment oriented, economy stimulating edifice. About The Author Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and "After the Rain - How the West Lost the East". He is a columnist in "Central Europe Review", United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia. His web site: http://samvak.tripod.com
Latest News:Site: Yahoo! News Search Results for news News 8 Red Cross blood drive in Orange News 8 and the Red Cross are teaming up again today for a 'Remembering 9/11 Blood Drive'. News Near You for Sept. 10 NEWS NEAR YOU HanoverThe annual winterization program in Hanover County is accepting applications from low-income, elderly or disabled homeowners and volunteers who want to help them. News by location Get local and national news updates via E-mail. Duke University School of Nursing will offer several graduate courses in Fayetteville in 2011. Participants will meet once a month at the Southern Regional Area Health Education Center at 1601 Owen Drive. Each course will involve online learning. News media giants tap new media to stay alive Traditional news media outlets are staving off their much-reported impending demise by learning to use the very social media tools that are supposedly clobbering them to death. News 8 Follows First-Year Teacher Throughout the school year, News 8 will follow Darryl Wende during his first year of teaching in a series of reports called "Making the Grade." News by location Get local and national news updates via E-mail. A small fire that someone set on a street in west Fayetteville may have been a ploy to get inside homes in the neighborhood, police said. News by location Get local and national news updates via E-mail. An investigator with the Consumer Product Safety Commission was at Fort Bragg on Thursday conducting tests inside a military home where three families were staying at different times before their babies died mysteriously. News Animation Goes Political: Knocks Pres. Obama Speech In New Video The Taiwanese NMA News animation videos are coming out with increasing regularity , and are getting more timely and news-worthy . In the past, they've been fairly fun in their bipartisan ribbing toward both political parties - but their latest Pres. Barack Obama video takes some sharp jabs at the Commander-in-Chief. News by location Get local and national news updates via E-mail. You had to feel good about how the rest of the state of North Carolina felt about Fayetteville and Cumberland County football this week as reflected in the first Associated Press high school polls. News by location Get local and national news updates via E-mail. Two men are accused of robbing a pizza delivery driver at gunpoint Wednesday night, off Rosehill Road. Site: news - Google News Adobe, Google on Apple's App Store Changes: 'great News' - PC World
MORE RESOURCES: Site: Yahoo! News Search Results for currency trading Dollar mostly ticks higher in subdued trading The dollar ticked mostly higher in thin trading Friday morning in New York after a U.S. government report showed a slightly improved jobs market. Don't Be Decimated by a Declining Dollar Currency trading is surging and the dollar is weakening -- two trends that can only continue. Yuan Trading Against Ruble Said to Start Within Weeks China may start yuan trading versus the Russian ruble within weeks, seeking to encourage use of its currency for global trade instead of the dollar, according to three bankers with knowledge of the matter. Trading Away the Stimulus Economic recovery depends on the government taking more effective steps to reduce the trade deficit. ANALYSIS-Brazil may be outgunned in fight to weaken currency ANALYSIS-Brazil may be outgunned in fight to weaken currency RPT-ANALYSIS-Brazil may be outgunned in fight to weaken currency RPT-ANALYSIS-Brazil may be outgunned in fight to weaken currency Russia's Ruble Will Be Included in CLS Trading System, Bank Rossii Says Ruble trading will soon be subjected to a so-called continuously linked-settlement system that ensures two sides of a currency trade are settled at the same time, said Sergei Kamburov , deputy head of the central bank?s department of financial-market operations. Sebi renews MCX-SX currency futures licence for one yr The Securities and Exchange Board of India (Sebi) has renewed the MCX Stock Exchange?s (MCX-SX?s) licence for offering currency futures for one more year. The licence was due to expire on September 15. Currency Crosses: Technical Outlook 09-08 The euro is weak across the board. In fact, the EURAUD is trading at a 19 year low and an objective is 1300 pips lower. Euro Edges Higher Against Major Rivals (RTTNews) - The European common currency traded higher against other major opponents during early European trading on Friday. The euro climbed to a 4-day high versus the Swiss franc. Site: currency trading - Google News Media: Expanded Thoughts on Potential Currency Trading Bubble - Benzinga
|
|
|
|
RELATED ARTICLES
The Secret of Reduced Margin Spreads One of the best kept secrets in trading is that of reduced margin spreads. You cannot name a trading method that provides more safety or a greater return on margin than does a reduced margin spread, while also being one of the least time- consuming ways to trade. The Secrets of the Super-Traders The first and perhaps most important "secret" is to realize that your methodology or approach (no matter how good) is only part of being a highly successful trader. This applies to any trading style including, day trading, swing trading or position trading. Learn Forex Trading - a Guide for Beginners One can learn forex trading as easily as one would like to learn other subjects or train in other professions. The criteria for learning forex trading is an analytical / logical bent of mind and some number crunching abilities. Trading Timeframes Long TermLong term traders will work from end of day data and look to hold trades for a few weeks up to many months. Usually trend trading. Day Trading the Index Futures - How to Judge Good Entries QUESTION: If the SP futures fall through support and go straight down for another two points, and I want to get short, should I a.)enter immediately, b. Disgruntled The following situation happens quite often to many traders. Look it over and see if it has been happening to you:You have been faithfully following your trading plan and the rules you've set for trading. FOREX 101: Make Money with Currency Trading For those unfamiliar with the term, FOREX (FOReign EXchange market), refers to an international exchange market where currencies are bought and sold. The Foreign Exchange Market that we see today began in the 1970's, when free exchange rates and floating currencies were introduced. Forex Signal, Forex Signals Advice There are lot's of Forex signals providers out there. New Forex traders might be thinking of looking for a reliable Forex signals provider. Intrenet Marketing VS Forex Currency Trading Have you noticed that when someone's trying to sell you something - such as a system for making money - they always make it look far easier than it is? Let's look at two Internet businesses, almost as diametrically opposed as it's possible to be - Internet Marketing and Forex Currency Trading.You've probably heard the old Internet adage - build a better website and they will come. Money Management, Part 2 FEARING LOSSESThere is a huge difference between being risk averse and fearing losses. You must hate to lose. Stocks Trading - Advantages and Disadvantages What is Stocks Trading?Companies throughout the world issue new stock shares every day. They do so to raise capital in order to invest in the business. What is Forex Trading? Forex, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another.The way it works is an investor who wishes to purchase or sell one currency for another with the hope of making a profit when the value of the currencies change in favor of the investor. Forex Currency Trading It is possible to buy and sell money from different countries on the foreign exchange market called Forex. Forex currency traders can profit by taking advantage of the dips and swells in the foreign currency market. Discovering Turnaround Candidates There are many types of investment methodology out there. All of them has their own merits. Forex Broker A broker is any person or firm that charges a fee in exchange for executing trades for a trader. A Forex broker does not charge a commission for placing a buy or a sell order the way a real estate broker would charge a percentage fee of the total price of a sale. The Major Players in the Foreign Currency Exchange Market - FOREX Since the US dollar is the centerpiece of the market,it is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. Sending Signals for Trading in Forex Forex signals are sent by a forex firm to their subscribers in order to buy and sell currencies. These signals are called entry and exit signals for the forex dealers. 5 Questions You Need To Have Answered Before You Back-Test Your Forex System As 90-95% of new forex traders lose money within the first 3-6 months this article helps to guide new forex traders by asking 5 questions that the forex trader needs to know prior to back-testing their forex system.Let us jump right in. Welcome to the World of Currency Trading Indeed large multinational and individual banks and other major financial institutions have dominated FX trading (also known as Forex trading), but there is a paradigm change in the nature and type of investing. According to one estimate, in the new millennium, there are over 6 million online investment accounts, up from 1. E-currency Exchange Trading If you are reading this article you are probably one of the many people who have spent countless hours searching for unique ways to make money on the internet. Very few people have gone on to succeed and most have failed miserably time and time again.
|
| Home | Site Map | Resource Links |
