Thursday, March 8, 2012











Let's suppose 2 countries with their respective currencies and interest rates. What happens with the currencies when one country raises its interest rate? Lower interest rate makes borrowing easier. Higher interest rate makes depositing more profitable.
Investors will borrow from the country with lower interest rate and deposit in banks of the country with higher interest rate. In order to deposit this money, they have to convert from one money to another. It means they will sell one currency to buy the other currency. Selling one currency makes the price of this currency to drop. So lower interest rate makes the currency price falls.

July 18th, 2010
I am reading a book on currencies. Currency prices can go up or down, according to supply and demand. Or does it? Why does a certain currency price go up or down? What makes a certain currency price fluctuate?
The world was in the gold standard from 1946 to 1971.

Ok, let's write something, even though I don't know what to write exactly. I am reading a book on FX. This is the second book I have about currencies. When I read these books I have the impression the world is completely controlled by currencies.
That seems to be the only reason to explain the rise and fall of countries. Apparently countries rise and fall just because of their currencies.
How a country like Japan, with no natural resources, can become the second economy in the world? The wealth of the nations. What makes a country become rich? Why China is getting rich?
Of all possible explanations apparently the major factor is the currency. Not just the currency. But currency seems to be the main factor to explain international trade surplus. What makes a country rich? Money?? Do all countries aim for trade surplus? Do they want to export more than they import? But it is impossible for all countries in the world to have trade surplus. It is a zero-sum game. If some country has a trade surplus, it is because some other country has a trade deficit. If trade surplus makes a country richer, it is because some other country is getting poorer.
It is not possible to have a trade surplus (or deficit) forever. It is unsustainable.
A trade deficit means that the country will sooner or later run out of money.
Every country seems to try to devalue its own currency, so its products become cheaper and more competitive, which increases exports, which results in trade surplus.

How can a country devalue its own currency?
- by lowering interest rates, making easier to borrow from banks, and increasing the money supply
- by printing money out of thin air, buying government bonds and increasing the money supply
- by buying dollars and selling its own currency,thus lowering the currency price, and increasing the money supply

How low should a country devalue its currency?
Can a country devalue its currency to zero? If the currency devalues to zero, the country will be unable to import. Countries like Japan, with no natural resources, are highly dependent on imports. From the point of view of imports it is the opposite: the higher the currency price, the easier to import. A higher currency makes imports cheaper. Countries would want to buy oil, for example, as cheap as possible.So countries would want to devalue the currency to improve exports, but revalue the currency to improve imports.
The higher the currency the cheaper the imports. The lower the currency the cheaper the exports. But exports seem to be more important than imports because countries aim for trade surplus, which means more exports than imports.

A country devalues its own currency by increasing the money supply. But increasing the money supply doesn't mean anything. It doesn't change the country. It actually impoverishes the country, by causing inflation.
Japan is right now suffering deflation, caused by lower comsumption, caused by lower salaries, caused by lower corporate profits, caused by lower exports.

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