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Thanks, appreciate the answer. Do you know of any more modern example of a western country devaluating? I'm under this non-productive impression that there's a

by latch 12y ago

Thanks, appreciate the answer. Do you know of any more modern example of a western country devaluating? I'm under this non-productive impression that there's a great sense of entitlement which is resulting in massive debt being accumulated and passed down to the next generation. My home province is such an example [1], which, in my mind, is the same ballpark as what I thought of Greece (more or less, Canada has a lot more flexibility and capacity to handle the challenge) [1] http://business.financialpost.com/2015/02/05/ontario-gouging-tomorrows-taxpayers-for-todays-spending/ http://business.financialpost.com/2015/02/05/ontario-gouging...

Lazare 12y ago
Devaluation was a more obvious thing in the days of fixed exchange rates; since the collapse of Breton Woods we tend to have floating rates, so it's all a bit more organic and flexible. So, for example, consider Britain. In 2006 and 2007, the pound-euro rate was quite steady, with the pound buying somewhere between 1.45 and 1.50 euros. When the financial crisis hit, the pound dropped like a rock, buying only 1.05 euros at the worst point. Since then, it's steadily re-appreciated, but even as recently as the start of this year it only bought less than 1.30 euros. Britain's devaluation was no accident; it was in fact one of the main goals of QE (or conversely, on of the main mechanisms by which QE was meant to work). Imagine if Greece could have knocked almost 1/3 off the value of their loans to Germany, their pensions, salaries, hotel rooms. Things might have been very different! Krugman has a column on devaluations in history you may find interesting as as well, he mentions Britain in 1992, as well as Sweden and South Korea: http://krugman.blogs.nytimes.com/2010/11/24/devaluing-history/?_r=0 http://krugman.blogs.nytimes.com/2010/11/24/devaluing-histor... In the present day, really, anywhere that had some form of QE was undergoing devaluation (under a floating rate regime, the way you devalue is to print a boatload of currency; since the demand is staying relatively constant, as supply goes up, price goes down). (Although keep in mind; devaluation is relative to somewhere else. Everyone can't devalue at once!)
- fpgeek 12y ago
  I'd make a small clarification: While it is true that everyone can't devalue at once in terms of relative exchange rates, everyone trying to devalue at once can still be useful. In that case you'd get worldwide inflation (arguably currencies devaluing vs goods), which is exactly what a depressed global economy would need.
  - Lazare 12y ago
    Mmm, that's a good point. Really, the bottom line is that countries routinely devalue when they get into trouble, and it serves them in good stead. Even during the great depression, there was a clear correlation between how soon the country dropped off the gold standard (and thus devalued) and how quickly they began to recover. (Britain did so quickly; the US did so slowly.)
fpgeek 12y ago
Probably the most on-point example of a sudden devaluation (rather than the gradual adjustment typical of countries with floating currencies) is the UK leaving the European Exchange Rate Mechanism in 1992 [1]. If you want to judge how that went, I'd note that the UK has done noticeably better than the Euro area post-crisis [2]. Exchange-rate flexibility probably had something to do with that. [1] http://en.wikipedia.org/wiki/Black_Wednesday http://en.wikipedia.org/wiki/Black_Wednesday [2] http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/2015/02/blogs/graphic-detail/20150221_gdc500.png http://cdn.static-economist.com/sites/default/files/imagecac...

by latch 12y ago

Lazare 12y ago

Devaluation was a more obvious thing in the days of fixed exchange rates; since the collapse of Breton Woods we tend to have floating rates, so it's all a bit more organic and flexible. So, for example, consider Britain. In 2006 and 2007, the pound-euro rate was quite steady, with the pound buying somewhere between 1.45 and 1.50 euros. When the financial crisis hit, the pound dropped like a rock, buying only 1.05 euros at the worst point. Since then, it's steadily re-appreciated, but even as recently as the start of this year it only bought less than 1.30 euros. Britain's devaluation was no accident; it was in fact one of the main goals of QE (or conversely, on of the main mechanisms by which QE was meant to work). Imagine if Greece could have knocked almost 1/3 off the value of their loans to Germany, their pensions, salaries, hotel rooms. Things might have been very different! Krugman has a column on devaluations in history you may find interesting as as well, he mentions Britain in 1992, as well as Sweden and South Korea: http://krugman.blogs.nytimes.com/2010/11/24/devaluing-history/?_r=0 http://krugman.blogs.nytimes.com/2010/11/24/devaluing-histor... In the present day, really, anywhere that had some form of QE was undergoing devaluation (under a floating rate regime, the way you devalue is to print a boatload of currency; since the demand is staying relatively constant, as supply goes up, price goes down). (Although keep in mind; devaluation is relative to somewhere else. Everyone can't devalue at once!)

fpgeek 12y ago
I'd make a small clarification: While it is true that everyone can't devalue at once in terms of relative exchange rates, everyone trying to devalue at once can still be useful. In that case you'd get worldwide inflation (arguably currencies devaluing vs goods), which is exactly what a depressed global economy would need.
- Lazare 12y ago
  Mmm, that's a good point. Really, the bottom line is that countries routinely devalue when they get into trouble, and it serves them in good stead. Even during the great depression, there was a clear correlation between how soon the country dropped off the gold standard (and thus devalued) and how quickly they began to recover. (Britain did so quickly; the US did so slowly.)

fpgeek 12y ago

Probably the most on-point example of a sudden devaluation (rather than the gradual adjustment typical of countries with floating currencies) is the UK leaving the European Exchange Rate Mechanism in 1992 [1]. If you want to judge how that went, I'd note that the UK has done noticeably better than the Euro area post-crisis [2]. Exchange-rate flexibility probably had something to do with that. [1] http://en.wikipedia.org/wiki/Black_Wednesday http://en.wikipedia.org/wiki/Black_Wednesday [2] http://cdn.static-economist.com/sites/default/files/imagecache/original-size/images/2015/02/blogs/graphic-detail/20150221_gdc500.png http://cdn.static-economist.com/sites/default/files/imagecac...