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Are overvaluated currencies the problem?

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rafamp posted on Sat, Oct 15 2011 10:31 PM

 

 So, I have a teacher that says that Brazil should devaluate his currency in order to grow its manufacturing industry. As Peter Schiff previously pointed out, the USD is more and more devaluated towards other currencies and the trade deficit is bigger and bigger. So I told that to my teacher.

 The answer I got was:

To begin with you have to look at the effective exchange rate, and not the nominal exchange rate. Secondly, you need to calculate the currency exchange misalignment of the American economy, I mean, the degree in which the effective exchange rate diverges from the equilibrium value of this rate (I suppose the Keynesians have a model for that?). As far as I know, the US have an over valuated exchange rate for over 30 years due to the "strong dollar" politics implemented by Paul Volker in the end of the 70s.

 Any thoughts on that?

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Devaluing a currency makes exports cheaper vis-a-vis other currencies, thereby increasing the quantity demanded, thereby increasing the volume exported. When accounting for the fall in the purchasing power (due to devaluation), however, ny benefits from increased volume sales are cancelled out. It is still baffling to me why many entrepreneurs seek this policy knowing (or do they?) that they don't gain anything on the net. One explanation is that through higher volume of sales they intend to capture greater market share abroad so when the currency reappreciates they will be in a more advantaged position to trade. But the obvious reply to this is that when the currency reappreciates, exports will become more expensive and volume will therefore fall, going back to point zero.

Let's not forget that any argument for devaluation, even if it was beneficial for the exporters (or "the manufacturing industry"), would definitely make everyone else who holds the currency poorer due to higher domestic prices and diminished savings. So from a utilitarian point of view alone, devaluation as a means of increasing exports is a net loss for the economy.

HUMAN ACTION

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Kel Kelly went into currency valuation in a recent Mises Daily.  He applies it to the current situation between the U.S. and China, but his explanation about currency valuation in general is excellent...

The China Bust: Tic Toc

 

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Verified by rafamp

Devaluing a currency makes exports cheaper vis-a-vis other currencies, thereby increasing the quantity demanded, thereby increasing the volume exported. When accounting for the fall in the purchasing power (due to devaluation), however, ny benefits from increased volume sales are cancelled out. It is still baffling to me why many entrepreneurs seek this policy knowing (or do they?) that they don't gain anything on the net. One explanation is that through higher volume of sales they intend to capture greater market share abroad so when the currency reappreciates they will be in a more advantaged position to trade. But the obvious reply to this is that when the currency reappreciates, exports will become more expensive and volume will therefore fall, going back to point zero.

Let's not forget that any argument for devaluation, even if it was beneficial for the exporters (or "the manufacturing industry"), would definitely make everyone else who holds the currency poorer due to higher domestic prices and diminished savings. So from a utilitarian point of view alone, devaluation as a means of increasing exports is a net loss for the economy.

HUMAN ACTION

  • | Post Points: 25
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