Wednesday, July 29, 2015

Currency Devaluation: The Crushing Vice of Price

Devaluation has a negative consequence few mention: the cost of imports skyrockets.
When stagnation grabs exporting nations by the throat, the universal solution offered is devalue your currency to boost exports. As a currency loses purchasing power relative to the currencies of trading partners, exported goods and services become cheaper to those buying the products with competing currencies.
For example, a few years ago, before Japanese authorities moved to devalue the yen, the U.S. dollar bought 78 yen. Now it buys 123 yen--an astonishing 57% increase.
Devaluation is a bonanza for exporters' bottom lines. Back in late 2012, when a Japanese corporation sold a product in the U.S. for $1, the company received 78 yen when the sale was reported in yen.
Now the same sale of $1 reaps 123 yen. Same product, same price in dollars, but a 57% increase in revenues when stated in yen.
No wonder depreciation is widely viewed as the magic panacea for stagnant revenues and profits. There's just one tiny little problem with devaluation, which we'll cover in a moment.
One exporter's depreciation becomes an immediate problem for other exporters: when Japan devalued its currency, the yen, its products became cheaper to those buying Japanese goods with U.S. dollars, Chinese yuan, euros, etc.
That negatively impacts other exporters selling into the same markets--for example, South Korea.
To remain competitive, South Korea would have to devalue its currency, the won. This is known as competitive devaluation, a.k.a. currency war. As a result of currency wars, the advantages of devaluation are often temporary.
But as correspondent Mark G. recently observed, devaluation has a negative consequence few mention: the cost of imports skyrockets. When imports are essential, such as energy and food, the benefits of devaluation (boosting exports) may well be considerably less than the pain caused by rising import costs.
Japan is a case in point. The massive devaluation of the yen was designed to boost Japan's exports and rocket-launch corporate profits, which was then supposed to drive a virtuous cycle of higher wages and increased employment.
But the benefits of the massive devaluation have been underwhelming. Some exporters have seen profits soar, helping to push Japan's stock market to post-1990 highs, but the effect is not universally positive.
Consider the plight of companies that must buy soybeans from the U.S. to make their food products. The cost of their raw materials just increased 50%, as a $1 of soybeans now costs 123 yen rather than 78 yen.
Given that major exporters of goods and services like China and Japan are importers of oil and food, devaluation is a ticking time bomb in terms of the cost of liquid fuels and food. The looming global recession and overinvestment in commodity production--driven by the zero-interest rate policies of the central banks--has created a temporary glut in oil and other commodities.
But as marginal producers are driven into bankruptcy or cut production, supply and demand will realign at some point. Somewhere not that far down the line, exporting nations that devalued their currency for the crack-cocaine hit of soaring revenues and profits in their home currencies will find the cost of essential imports will skyrocket while the benefits of their devaluation fade in the currency wars they instigated.
Authorities pushing currency devaluation as a cure for their stagnating economies might want to study Frederic Bastiat's insight into the eventual cost and consequences: "For it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.”

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Scott C. ($50), for yet another monumentally generous contribution to this site-- I am greatly honored by your steadfast support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP