I have a question on economics which has been puzzling me for a long time. Occasionally, I read news about countries like Japan and Switzerland struggling to defend their currency from rising too much.
Why should they be struggling? Suppose the currency is over-valued. Central bankers should be happy when foreigners buy up their over-valued currency. Just print more money and dump the over-valued currency to the foreigners who insist on buying it. 抛砖引玉. It should be very easy to defend against the strength of a currency. It can even be an opportunity to build up foreign reserves at low cost at the expense of foreigners.
I can understand why it is hard to defend against the weakness of a currency (Read the Asian Financial Crisis). But I cannot understand why countries like Switzerland and Japan are "struggling" to defend against the strength of their currencies.
Can someone enlighten me? Thank you.
the lead to Asian Financial Crisis is failure to defend the strength of Thai Baht/Indonesian Rupiah, etc.
(18-08-2012, 10:40 AM)freedom Wrote: [ -> ]the lead to Asian Financial Crisis is failure to defend the strength of Thai Baht/Indonesian Rupiah, etc.
Then at the earlier stage, the Asian central banks could have printed money to defend against their currency's strength and build up foreign reserves. There should be no struggle in getting this done. Printing money is easy for central banks. With the foreign reserves, they can more easily defend against the currency's weakness when the crisis struck.
using your method, the Asean governments printed money to defend against their currency's strength. what would happen? There would be a flush of Thai Baht circulating in Thailand only, which could easily cause asset bubble and high inflation.
Having a strong currency, it would create an easy environment of cheaper foreign borrowing, which could encourage local firms to borrow more from international markets in USD(which happened in 1997 in Indonesia at least).
(18-08-2012, 11:05 AM)freedom Wrote: [ -> ]using your method, the Asean governments printed money to defend against their currency's strength. what would happen? There would be a flush of Thai Baht circulating in Thailand only, which could easily cause asset bubble and high inflation.
Having a strong currency, it would create an easy environment of cheaper foreign borrowing, which could encourage local firms to borrow more from international markets in USD(which happened in 1997 in Indonesia at least).
To offset the money printing, they can hike interest rates at the same time or mandate banks to store a higher reserve in their banks.
(18-08-2012, 11:07 AM)propertyinvestor Wrote: [ -> ] (18-08-2012, 11:05 AM)freedom Wrote: [ -> ]using your method, the Asean governments printed money to defend against their currency's strength. what would happen? There would be a flush of Thai Baht circulating in Thailand only, which could easily cause asset bubble and high inflation.
Having a strong currency, it would create an easy environment of cheaper foreign borrowing, which could encourage local firms to borrow more from international markets in USD(which happened in 1997 in Indonesia at least).
To offset the money printing, they can hike interest rates at the same time or mandate banks to store a higher reserve in their banks.
so? business would borrow from international market in other currency. that's exactly what happened in 1997.
Here's what i think.
Inflation - All your daily expenses will shoot through the roof. Remember the whole idea is to strengthen US economy by making their export cheaper. So Mr. Ben will keeps printing together with you.
Assuming you can absorb the inflation round after round. We are allowing easy exchange of toilet money with our countryman hard work. American will laugh at your stupidity as they maintain their lifestyle while we all slog like Sh** since theirs are consumer economy and US dollar is a trade currency.
Finally, when America economy picks up finally, an excuse comes in. Wham ! A Forex Tsunami sweeps across Asia, and people starts dumping your currency back to you that they buy earlier when they print theirs in exchange with your sweat currency. How high the tsunami hits you depend how much rounds you have have actually keep printing to weaken your money! Likely the weakest link will break. The last time is Thai Baht which kick-start the whole chain event last time.
freedom Wrote:using your method, the Asean governments printed money to defend against their currency's strength. what would happen? There would be a flush of Thai Baht circulating in Thailand only, which could easily cause asset bubble and high inflation.
Having a strong currency, it would create an easy environment of cheaper foreign borrowing, which could encourage local firms to borrow more from international markets in USD(which happened in 1997 in Indonesia at least).
That is a good answer. Let me rephrase in my own words. Although central banks can easily defend against a currency from strengthening by printing money, they have to worry about unintended consequences like creating asset bubbles and inflation. The bust after the boom created by loose monetary policies will be much more devastating if too much money is printed.
freedom Wrote:the lead to Asian Financial Crisis is failure to defend the strength of Thai Baht/Indonesian Rupiah, etc.
The failure was caused by the fixed currency peg to the US dollar. The Asian currency was artificially strong and was not allowed to fluctuate normally due to the peg. Meanwhile, interest rates in the local currency were high because they reflected the true risk. Businessmen borrowed money in foreign currencies at low interest rates thinking that their central banks will have the means to maintain the currency peg. Unfortunately, a fixed currency peg is hard to maintain if the local currency is over-valued. Although a central bank can prevent its local currency from going up by printing money, it cannot prevent its currency from going down without sufficient foreign reserves. No central bank, not even the Fed, can fight the forex market because it is the most liquid market among all asset classes.
there are two kinds of money printing. one is active printing like fed printing during financial crisis in 2008 - 2009 to pump liquidity, it is very manageable from fed's point of view thus the inflation in US is controllable. another one is reactive printing like what China is doing now because too much foreign money flow into China on expectation of RMB appreciation, which often leads to asset bubble like what China is experiencing now.
hyom Wrote:Central bankers should be happy when foreigners buy up their over-valued currency. Just print more money and dump the over-valued currency to the foreigners who insist on buying it.
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It can even be an opportunity to build up foreign reserves at low cost at the expense of foreigners.
I agree that in theory it should be a simple matter to print local paper to acquire international assets (gold, foreign exchange, food, energy).
But the consequences of local inflation have also been pointed out. So the trick is to acquire the assets without having the newly created money circulate in the economy. One way is to force the banks to hold more money in reserve - this prevents the banks from financing an asset boom. Raising interest rates can pre-empt an asset boom, but may also push the currency higher (which could allow the sale of yet more currency).
In a company it is trivial to issue shares when the price is high - there is no impact to the operations, only the balance sheet. But that is because the stock market and the business world use different currencies. Only at issuance does the "exchange rate" matter.
In a country, the forex market and the business world use the same currency. As a result, when the forex market is (ab)used the business world is also affected. So it takes a lot more coordination between the governments and the banks - who may not always cooperate fully.