WHAT IS UP WITH DEVALUATION TREND?
The recent election had been plagued with several controversies and issues, which centers mostly on political misconduct and taxes. Aside from this, another agenda that has been largely discussed is China’s alleged intentional devaluing of their cash for their own economic benefit, which was slammed by the incoming US head constantly. This move is also being blamed for the global uncertainty in markets as many other nations have mimicked the strategy ever since the gold standard was abolished. If the result of this action can be harmful in so many ways, then why are more and more states adapting this practice?
To lift exports
As products around the world compete in the marketplace, a decrease in a currency’s value against another will cause the prices of its goods to be relatively more affordable compared to a more valuable denomination which will result to a more expensive purchase of exports in foreign markets. In short, exporting is highly encouraged while importing is not. However, it is important to take into account that as demand for export increases, its cost is likely to jump as well, which will normalize the devaluation’s effect. Second, many will be lured to try out the technique, which may cause currency wars and inflation.
To slash trade deficits
A hike in exports will also pave way for an improved balance of payments, which will aid in the reduction of deficits in trading, which are becoming common today and initiates the risk of a debt that can remarkably slowdown an economy. Still, there is a downside to this concept, as lowering the value of a currency may also burden foreign denominated loans priced domestically. This can be a problem for developing states, as it lessens the public’s confidence in their local money.
To scale down national debt
Urging a weak currency regulation if it is saddled in a huge pile of debt to fund on a daily basis. If payments are fixed, depreciated bills will make payments less pricey overtime. For example, if a government is required to compensate for a $1M of interest monthly on its arrears, a cut of its initial worth by half will convert that rate into $500,000. Despite this, negative effects are again present in this idea since it can spur recessions as countries race to the bottom, resulting to more harm than good.
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