torsdag, juli 30, 2009

 

Discussion concerning exchange rates

As usual Stefan Karlsson refuses to publish comments where he is refuted. This time we have been discussing exchange rates and I have been arguing that all countries can devalue their exchange rates at the same time and by the same nominal amount, whereas he argues that they cannot.

At first glance Mr. Karlsson's argument seems to make sense. Suppose that all countries of the world were united in a monetary union similiar to that of the the euro-zone. I am thinking of a situation where all the countries of this planet would use one single paper currency and that this currency would have no formal link to gold. Would it really be possible for such a global monetary union to devalue its exchange rate? If there are no other currencies than that issued by the global central bank is there really anything to devalue in relation to?

Actually there is.

The global central bank could undertake interventions in the gold market in order to attempt to raise the relative price of gold, which would have precisely the same effect as if a country with a national paper currency would successfully do the same. The only noteworthy difference would be that the devaluation on behalf of a global central bank would affect net importers and net exporters of gold in different manners.

However: If the Swedish central bank were to undertake interventions in the gold market in an attempt to bring about a higher relative price of gold and the operation were successful, that would affect regions within Sweden with and without gold mining industry in different manners. So strictly speaking there is no difference at all between a devaluation on behalf of global monetary union and on behalf of a national central bank.

Please note that I am not discussing whether it is wise to devalue.

Comments:
This is an interesting post! My first reaction was that Karlsson is right. (As you say: At first glance...) But when you got to "interventions in the gold market..." a door opened up and I think you are correct.

In a "closed" economy (one with no foreign trade, like your "global monetary union") there may come a time when the effects of inflation could be thought beneficial for some reason. And a policy of positive inflation could certainly be established in that closed economy. And inflation in a closed economy is essentially the same as devaluing a currency in your global monetary union. So: Yes I agree with you that it can be done.

I think many of the words and phrases become obsolete. If there is only one currency then there is no "exchange rate." And the phrase "net importers and net exporters" loses its meaning in a global economic union. But these problems are minor (except that maybe they cause Karlsson to misunderstand your view).

Like you, I am not discussing whether it is wise to devalue. I am not discussing whether it is wise to inflate. And I am most certainly not arguing in favor of a "global monetary union" !!!
 
Well, if South Africa and Germany would be united in this global monetary union, I think that South Africa and Germany would be affected in different manners by an intervention in the gold market on behalf of the Global Central Bank (GCB) since Germany is a net importer and South Africa a net exporter of gold.

Given that the Germans would not reduce their imports of gold due to a higher gold price, but instead buy more in antecipation of a even higher price, South Africans would earn greater amounts of Global Monetary Units which probably would produce an inflationary effect in South Africa without any such effect in Germany.

But of course I agree with you that the Global Economic Union would neither be a net importer nor a net exporter of gold.

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