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Going by elementary macroeconomic principles, currency unification will always result in "dead zones," because their exchange rates can't stabilize the balance

Going by elementary macroeconomic principles, currency unification will always result in "dead zones," because their exchange rates can't stabilize the balance of trade.

MichaelZuo 2y ago
What does ‘ exchange rates can't stabilize the balance of trade’ mean?
- AnimalMuppet 2y ago
  If the US is trading with the EU, say, and the US is importing too much and exporting too little, eventually that affects the exchange rate between the dollar and the euro. That adjusts in a way that somewhat counteracts the trade imbalance. But if Portugal imports too much from France and exports too little, and they're both using the euro, then there is no exchange rate to adjust, and so you're just left with the trade imbalance and no adjustment.
  - moffkalast 2y ago
    So what, the exchange rate in that case would change so US consumers lose buying power for EU imports as a sort of automatic customs fee and as a result would prefer locally made alternatives? I would question how well that works outside completely generic goods that you can buy anywhere, since with economies of scale consolidating production there is often hardly any alternative anymore. Also, feels like there could be a way to manually address the balance without reducing people's standard of living.
    - whatshisface 2y ago
      The balance is not maintained for individual goods, but rather for the whole market. If the EU is better than the US at manufacturing everything, the exchange rate will fall until the US can at least do one thing cheaper. Exchange rates don't help raise people's standards of living, but they do prevent countries from becoming economic dead zones.
  - MichaelZuo 2y ago
    But there is an adjustment in the total wealth owned in aggregate by those in Portugal vs. France, which is what’s important at the end of the day, right? Eventually those in Portugal will not have enough wealth to import above their exports, depending on how much stored wealth they have in aggregate. So it’s still guaranteed to balance out on a century timescale…
    - deleted 2y ago
      [deleted]
    - s1artibartfast 2y ago
      The end states are different however. >So it’s still guaranteed to balance out on a century timescale… Balance in what sense? In terms of trade, countries can perpetually run a deficit if they share a currency. Wealth isnt zero sum and is continually created. This can be used to pay a perpetual deficit at a cost to growth.
      - MichaelZuo 2y ago
        Isn’t it the relative level that decides the balance between imports and exports? Not the absolute level of wealth?
        s1artibartfast 2y ago
        relative level of what? I dont understand your question.
        MichaelZuo 2y ago
        Relative level of wealth available for importing…
        s1artibartfast 2y ago
        I see. Even if you have little wealth, I dont mind taking it all. It just means you cant buy much. Imagine of two families. Whenever one gets money, it buys food from the other. The 2nd keeps taking the money and investing in their garden, making it bigger and more efficient. IF they share a currency,
  - HarHarVeryFunny 2y ago
    Exchange rates are determined by markets based on supply and demand, with demand being based on things like investment opportunity, as well as structural demand such as for petro-dollar oil payments. Currency markets are mostly too big for governments to be able to manipulate (e.g. George Soros & GBP).
    - whatshisface 2y ago
      The market can adjust the exchange rate between the US and the EU, but not between the Portugal and Spain. This is in a sense the ultimate in government currency control, and if 1:1 is not the exact ratio that the market would have set, one of the two countries will be emptied out.
      - HarHarVeryFunny 2y ago
        If the Portuguese economy was booming relative to Spain, then "the market" (investors) can still take advantage of that by investing in other Portuguese assets such stocks and real estate. If a government wants to address a trade imbalance then import tariffs is one way to do it - or policy changes affecting cost of goods produced for export.
eschulz 2y ago
I feel this has also been a challenge for Greece among other places. Can they adapt within the economic zone, say to become tourist havens while the bigger states provide industry and services? Should they leave the Euro?
- alephnerd 2y ago
  Greece should have never joined the Eurozone, and are basically a middle income country despite their high GDP per capita (median household incomes are comparable to Mexico and Malaysia). That said, leaving the Euro would be too economically traumatic for Greece at this point.
bobthepanda 2y ago
This is broadly true for any division of land with a single currency but it’s not as if going to tiny city states with unique currencies is also a good idea.
- whatshisface 2y ago
  You could have more currencies than states. That is how it used to work in the US.
  - JumpCrisscross 2y ago
    > how it used to work in the US For a definition of “work” which normalises constant financial crisis.
    - whatshisface 2y ago
      Frequent financial crises. Constant financial crisis better describes our dying small towns.
      - JumpCrisscross 2y ago
        > Constant financial crisis better describes our dying small towns Financial crises are characterised by assets suddenly losing their nominal value. Our dying towns are in structural decline. Not financial crisis.
marcosdumay 2y ago
The balance of payments is always self-stabilizing. The trade component can only have a non-zero integral when somebody is injecting or removing money from the economy by some other means. What really means that no, economical dead zones have no relation at all with the balance of trade. And also, the balance of trade predicts almost nothing and is controllable by policy, anybody focusing on it is just throwing a red herring and hopping people don't look at actually important things. (What doesn't mean that currency unification doesn't cause dead zones. I know that this explanation is wrong, I don't know if it happens or not.)
- whatshisface 2y ago
  >The trade component can only have a non-zero integral when somebody is injecting or removing money from the economy by some other means. People late in their careers are buying imports, people early in their careers are leaving the country. That's as clear of a case of the integral going negative as I can imagine.
  - marcosdumay 2y ago
    "By some other means" literally means that how people trade can't impact the balance. People leaving the country carrying money is an example of those "other means", people buying imports isn't. Either way, it's a bad number to even look at. It meaningless.
- s1artibartfast 2y ago
  >when somebody is injecting or removing money from the economy by some other means. Which should be considered the normal state for an economy that with growth and production. The issue is that a negative trade deficits are sustainable, but come directly out of the wealth growth of the importing country. If you have $2 of value per year, and loose net $1 across the boarder, you never accumulate wealth.
  - whatshisface 2y ago
    That's a little flattened because oftentimes that $1 will go across the border in exchange for ownership of foreign assets.

Going by elementary macroeconomic principles, currency unification will always result in "dead zones," because their exchange rates can't stabilize the balance of trade.

MichaelZuo 2y ago

What does ‘ exchange rates can't stabilize the balance of trade’ mean?

AnimalMuppet 2y ago
If the US is trading with the EU, say, and the US is importing too much and exporting too little, eventually that affects the exchange rate between the dollar and the euro. That adjusts in a way that somewhat counteracts the trade imbalance. But if Portugal imports too much from France and exports too little, and they're both using the euro, then there is no exchange rate to adjust, and so you're just left with the trade imbalance and no adjustment.
- moffkalast 2y ago
  So what, the exchange rate in that case would change so US consumers lose buying power for EU imports as a sort of automatic customs fee and as a result would prefer locally made alternatives? I would question how well that works outside completely generic goods that you can buy anywhere, since with economies of scale consolidating production there is often hardly any alternative anymore. Also, feels like there could be a way to manually address the balance without reducing people's standard of living.
  - whatshisface 2y ago
    The balance is not maintained for individual goods, but rather for the whole market. If the EU is better than the US at manufacturing everything, the exchange rate will fall until the US can at least do one thing cheaper. Exchange rates don't help raise people's standards of living, but they do prevent countries from becoming economic dead zones.
- MichaelZuo 2y ago
  But there is an adjustment in the total wealth owned in aggregate by those in Portugal vs. France, which is what’s important at the end of the day, right? Eventually those in Portugal will not have enough wealth to import above their exports, depending on how much stored wealth they have in aggregate. So it’s still guaranteed to balance out on a century timescale…
  - deleted 2y ago
    [deleted]
  - s1artibartfast 2y ago
    The end states are different however. >So it’s still guaranteed to balance out on a century timescale… Balance in what sense? In terms of trade, countries can perpetually run a deficit if they share a currency. Wealth isnt zero sum and is continually created. This can be used to pay a perpetual deficit at a cost to growth.
    - MichaelZuo 2y ago
      Isn’t it the relative level that decides the balance between imports and exports? Not the absolute level of wealth?
      - s1artibartfast 2y ago
        relative level of what? I dont understand your question.
        MichaelZuo 2y ago
        Relative level of wealth available for importing…
        s1artibartfast 2y ago
        I see. Even if you have little wealth, I dont mind taking it all. It just means you cant buy much. Imagine of two families. Whenever one gets money, it buys food from the other. The 2nd keeps taking the money and investing in their garden, making it bigger and more efficient. IF they share a currency,
- HarHarVeryFunny 2y ago
  Exchange rates are determined by markets based on supply and demand, with demand being based on things like investment opportunity, as well as structural demand such as for petro-dollar oil payments. Currency markets are mostly too big for governments to be able to manipulate (e.g. George Soros & GBP).
  - whatshisface 2y ago
    The market can adjust the exchange rate between the US and the EU, but not between the Portugal and Spain. This is in a sense the ultimate in government currency control, and if 1:1 is not the exact ratio that the market would have set, one of the two countries will be emptied out.
    - HarHarVeryFunny 2y ago
      If the Portuguese economy was booming relative to Spain, then "the market" (investors) can still take advantage of that by investing in other Portuguese assets such stocks and real estate. If a government wants to address a trade imbalance then import tariffs is one way to do it - or policy changes affecting cost of goods produced for export.

eschulz 2y ago

I feel this has also been a challenge for Greece among other places. Can they adapt within the economic zone, say to become tourist havens while the bigger states provide industry and services? Should they leave the Euro?

alephnerd 2y ago
Greece should have never joined the Eurozone, and are basically a middle income country despite their high GDP per capita (median household incomes are comparable to Mexico and Malaysia). That said, leaving the Euro would be too economically traumatic for Greece at this point.

bobthepanda 2y ago

This is broadly true for any division of land with a single currency but it’s not as if going to tiny city states with unique currencies is also a good idea.

whatshisface 2y ago
You could have more currencies than states. That is how it used to work in the US.
- JumpCrisscross 2y ago
  > how it used to work in the US For a definition of “work” which normalises constant financial crisis.
  - whatshisface 2y ago
    Frequent financial crises. Constant financial crisis better describes our dying small towns.
    - JumpCrisscross 2y ago
      > Constant financial crisis better describes our dying small towns Financial crises are characterised by assets suddenly losing their nominal value. Our dying towns are in structural decline. Not financial crisis.

marcosdumay 2y ago

The balance of payments is always self-stabilizing. The trade component can only have a non-zero integral when somebody is injecting or removing money from the economy by some other means. What really means that no, economical dead zones have no relation at all with the balance of trade. And also, the balance of trade predicts almost nothing and is controllable by policy, anybody focusing on it is just throwing a red herring and hopping people don't look at actually important things. (What doesn't mean that currency unification doesn't cause dead zones. I know that this explanation is wrong, I don't know if it happens or not.)

whatshisface 2y ago
>The trade component can only have a non-zero integral when somebody is injecting or removing money from the economy by some other means. People late in their careers are buying imports, people early in their careers are leaving the country. That's as clear of a case of the integral going negative as I can imagine.
- marcosdumay 2y ago
  "By some other means" literally means that how people trade can't impact the balance. People leaving the country carrying money is an example of those "other means", people buying imports isn't. Either way, it's a bad number to even look at. It meaningless.
s1artibartfast 2y ago
>when somebody is injecting or removing money from the economy by some other means. Which should be considered the normal state for an economy that with growth and production. The issue is that a negative trade deficits are sustainable, but come directly out of the wealth growth of the importing country. If you have $2 of value per year, and loose net $1 across the boarder, you never accumulate wealth.
- whatshisface 2y ago
  That's a little flattened because oftentimes that $1 will go across the border in exchange for ownership of foreign assets.