When you think of countries devaluing their currencies, most people immediately think of China. They’re famous for doing it and it has happened more than once. So why do countries devalue their currencies? There are many reasons why countries like China do this, but mainly it’s to improve export rates.
This also can have far-reaching effects as it can bring global uncertainty to financial markets. But in the long run, it usually boosts global trade.
It’s possible to manipulate currencies as countries abandoned the gold standard. As a result, their exchange rates float freely against each other.
This is something to be considered seriously as currency devaluation affects not only the nation’s citizens but also people around the world.
For example, devaluing currency can boost exporting in one country and diminish it another. This would mean the loss of trade and in turn employment in the country that didn’t devalue its currency.
Devaluing currencies can go a long way to making the country competitive. The currency value directly impacts the price of the product being exported, so importers will always look for the cheaper option.
More of often than not, the country with the stronger currency will buy products from a country with a weaker currency. It’s just how global capitalism works.
On the other hand, imports will be discouraged in the country that devalued its currency. But as more and more products are exported across the world, the devalued currency will rise in value and be normalized.
As exports increase and imports decrease, it will shrink trade deficits and improve the balance of payments. At the same time, persistent imbalances aren’t unheard of, in fact, the United States is known for this. But according to economic theory, if left unchecked, it could lead to dangerous levels of debt and cripple the economy.
So when something like that is looming in the future, devaluing the currency can help balance the books.
But if the nation has loans in foreign denominations, this can increase the burden in the home currency. This is the problem faced by emerging economies such as Argentina and India.
If there’s government issued sovereign debt, a weaker currency can make debt payments inexpensive over time if the debt payments are fixed.
But caution must be practiced as other countries might also be tempted to do the same creating a currency war and unchecked inflation. It’s not an easy thing manage so it has to be approached carefully in order to avoid destroying the national economy.