Nwakego Eyisi
Understanding paper money
What does a dollar, Yen, Pound Sterling, Yuan and Euro mean?
Paper money is a reflection of the health of an economy, in other words it moves in the same direction with the economy it represents.
For instance when the right policies are made it attracts capital flows or foreign direct investment. Capital flows creates jobs and increases economic growth. It also means the country is richer. When this happens the national currency appreciates.
The exact opposite happens when bad policies are made, it leads to capital flight and a reduction in economic growth, (in other words the country is poorer) eventually the currency depreciates or loses value.
Usually when a country’s currency loses value it means that export oriented industries will do well (for countries that are productive) and vice versa when the currency appreciates. That is one reason governments (for export driven economies) intervene to keep (or peg) their currency at a certain level.
Currencies (Yuan, Yen, Dollar) and fundamentals
Does a rigged currency reflect the true state of these economies?
“China is a top destination for capital but has a currency that is grossly depreciated”
“The Yen should trade higher because of capital flows and the strength of the Japanese economy”
“The EURO (currently) does not reflect the fundamentals of a productive German economy”
“Brazil and South Africa’s currencies are probably too strong (overvalued) for their economies”
If the big players (China, USA and Japan) are manipulating their currencies it means there is a distorted picture of the health of these economies (and the global economy by extension).
For instance Japan flooding currency markets with cheap Yen to reduce its value might help export oriented (Toyota, Mazda, Honda) industries but what would it do to savings and consumption? what about asset bubbles and inflation?
It is the same argument for China, where the authorities has not allowed the Yuan to appreciate when the markets demands that it appreciates.
Restive capital and add ons from global recession
This does not bode well for capital. Even when capital moves to countries (Brazil, Switzerland) where it is guaranteed higher returns it still creates problems because it is not wholly market driven. That is why Brazil imposed taxes on capital flows because it hurt the economy.
In 2007/2008 countries around the world lowered interest rates to accommodate the recession. This tinkering of interest rates makes capital restive because capital typically moves to regions of higher returns. Let’s not forget that low-interest rates debases paper money because central banks inflate and flood the markets with cheap money when interest rates are lowered.
Add this to the current currency wars and it is easy to predict anemic growth going forward.
