The Federal Reserve recently came out with an interesting discussion paper which attempts to discredit the commonly held view that Currency Crashes are economically devastating.
In Currency Crashes in Industrial Countries: Much Ado About Nothing? Fed economist Joseph E. Gagnon concludes that crashes can be occasionally good ...
``Currency crashes in industrial countries have always been associated with at least one of the following causal factors:
-Inflationary macroeconomic policies that put upward pressure on all prices, including the price of foreign currency. (my comment-printing money)
-Weak aggregate demand and rising unemployment that encourage policymakers to stimulate growth through expansionary monetary policy, including devaluation in the case of a fixed exchange rate. (my comment printing money again)
-Large capital outflows or current account deficits that run into financing difficulties. In some cases, these deficits may reflect either of the above forces (my comment printing money again), but they may also reflect exogenous shifts in the terms of trade or in financial market sentiment (my comment-currency run due to previous money printing or too much debt absorption held in foreign currency-currency mismatch).
``The consequences of currency crashes depend critically on the causes. Poor outcomes have occurred only after inflationary currency crashes. The responses of macroeconomic policymakers after inflationary currency crashes had important implications for GDP growth. Tighter policies to fight inflation generally reduced GDP in the short run. (my comment-recession)
``When authorities did not fight inflation, GDP growth generally held up in the near term." (my comment-let inflation rip...).
``Bond yields usually rose and real equity prices usually fell during and immediately after inflationary currency crashes."
``Non-inflationary currency crashes uniformly had good outcomes: GDP growth was average to above average, bond yields fell, and real equity prices rose."(my comment-yehey printing money solves the society's ills).
Could this study serve as a fundamental justification or a trial balloon of the US Federal Reserve's possible policy direction-which is to go for a massive US dollar devaluation (crash)?
As Axel Merk of Merk Funds recently wrote, ``There is one area we are in agreement with Fed Chairman Bernanke: those countries that devalue their currency may recover more quickly from a depression. Rather naturally so: if the purchasing power of your savings is slashed, you have a great incentive to work again."
In short if your currency is worth less than what was, one will be forced to double work efforts.
But with too much debt in the system, devaluation seems to be Ben Bernanke's nuclear option. Could he be telegraphing his moves?
In Currency Crashes in Industrial Countries: Much Ado About Nothing? Fed economist Joseph E. Gagnon concludes that crashes can be occasionally good ...
``Currency crashes in industrial countries have always been associated with at least one of the following causal factors:
-Inflationary macroeconomic policies that put upward pressure on all prices, including the price of foreign currency. (my comment-printing money)
-Weak aggregate demand and rising unemployment that encourage policymakers to stimulate growth through expansionary monetary policy, including devaluation in the case of a fixed exchange rate. (my comment printing money again)
-Large capital outflows or current account deficits that run into financing difficulties. In some cases, these deficits may reflect either of the above forces (my comment printing money again), but they may also reflect exogenous shifts in the terms of trade or in financial market sentiment (my comment-currency run due to previous money printing or too much debt absorption held in foreign currency-currency mismatch).
``The consequences of currency crashes depend critically on the causes. Poor outcomes have occurred only after inflationary currency crashes. The responses of macroeconomic policymakers after inflationary currency crashes had important implications for GDP growth. Tighter policies to fight inflation generally reduced GDP in the short run. (my comment-recession)
``When authorities did not fight inflation, GDP growth generally held up in the near term." (my comment-let inflation rip...).
``Bond yields usually rose and real equity prices usually fell during and immediately after inflationary currency crashes."
``Non-inflationary currency crashes uniformly had good outcomes: GDP growth was average to above average, bond yields fell, and real equity prices rose."(my comment-yehey printing money solves the society's ills).
Could this study serve as a fundamental justification or a trial balloon of the US Federal Reserve's possible policy direction-which is to go for a massive US dollar devaluation (crash)?
As Axel Merk of Merk Funds recently wrote, ``There is one area we are in agreement with Fed Chairman Bernanke: those countries that devalue their currency may recover more quickly from a depression. Rather naturally so: if the purchasing power of your savings is slashed, you have a great incentive to work again."
In short if your currency is worth less than what was, one will be forced to double work efforts.
But with too much debt in the system, devaluation seems to be Ben Bernanke's nuclear option. Could he be telegraphing his moves?
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