From: lteo_ss@troi.cc.rochester.edu (Leslie Teo)
Subject: Re: VAlue of money
Organization: University of Rochester (Rochester, NY)
Date: Fri, 8 Jan 93 15:33:30 GMT

In article <1993Jan7.042753.14116@ntuix.ntu.ac.sg> othman@ntrc25.ntrc.ntu.ac.sg (othman (EEE/Div 4)) writes:
>I bring this topic forward becuase of contrasting economic policies of
>various nations.
>	For those who may be interested to study more, please read the
>articles in Fortune concerning the german central bank.
>	During the last election in Malaysia the government defends its policy
>of devaluing Malaysian ringgit and they won the election. The argument brought
>forward was that it will cost billions to maintain the value of the ringgit.

I realize that governments like to claim that they can  control/maintain
the value of a currency (with respect, usually to another currency ie.
the US dollar or a basket of other currencies.) To a certain extent this
is true:  BUT for reasons that might differ than from  what the rhetoric
suggests. That is, the value of the ringgit is not at 2.75/US dollar
because the government says so but because the market determines that is
its value. This is not to say that governments can't fix an official
rate (and the Malaysian government does this, at least it used to) but
whether that rate  holds any water depends on what the government does.
For example, policies which encourage economic growth might increase
investor confidence; more people would want to hold the ringgit thus
increasing demand for the ringgit and increasing it's value with respect
to other currencies. Similarly, fiscal policies which are responsible
might also increase the demand for the ringgit. (The reason the ringgit
increases in value when there is a large public offering of stocks in
"good" public companies, I would guess, is because there is a larger
than normal demand for ringgit. Similarly, one could probably find
instances when the ringgit increases in value temporarily when oil or
rubber stocks are sold overseas.  However I would caution against
investing in currency markets just yet; there is a theory called the efficient
market hypothesis which suggests that no one would beat the market on
average.  Sorry about the long digression.) This fact--government
influence (or rather non-influence) over exchange rates--is more true today than ever before.
About one trillion dollars moves around each day in international
capital markets and not even the Federal Reserve, Bundesbank, Bank of
Japan, and the Bank of England (combined) can sustain (by buying
or selling currencies on the market, which is how value is determined)
any currency against market  trends. Eg. the devaluation of the pound
recently or India's devaluation of the rupee last year. Basically, a
country's currency value is determined by the law of supply and demand
and supply and demand is usually affected by the country's economic
strength. 

>It strikes me as though the billions actually come from my savings. It is a
>licence to steal/tax people's money efficiently. But is it fair to the majority?
I'm not sure what you mean. I guess you're saying that because the
ringgit has fallen in value you have "lost" some "money/value". It's an
interesting point. I would also guess that you'
re  saying the government gets this extra tax by printing more money
(usually thats how it's done). The problem with such a policy (it
occurred in many African and Latin American countries) is that things
can get easily out of hand. It wouldn't be difficult to cause high
inflation and once the market sees the pattern, ringgit could be dumped
on the market, etc. Since, the government has been trying in to reign in
monetary growth in the past couple of years I don't think they have
deliberately devalued the currency. (In my opinion.) The currency has
lost value (with respect to other currencies), I think, because of
economic fundamentals. This is not to  say that the government hasn't
tried to manipulate the value of the currency in the market though that
isn't easy and will probably get more difficult. 

>
>Those who borrow a lot will gain during a devaluation because property prices
>remain high after all physical objects and imports will be priced realistically.
You're right. It's because of inflation.  

>
>Singapore has chosen the strenghtening of its currency. the same with Germany.
>Britain tried to do it but it is too expensive for them becuase it has too much
>government deficit.

Again, Singapore's  currency has grown in value (wrt other currencies)
because demand for the currency is high. Similarly for Germany. Read my
comments above.

>
>The ringgit starts to drop again in liew of the current royalty battle. Could it
>be the government spending money campaining?
>
>I can bet that during election time, the ringgit will drop in value again,
>with the government printing more money.

Call me naive but I think the chaps at Bank Negara have enough brains to
realize that they shouldn't be playing with fire. Yes, government might
print more money (or spend more) increasing inflation, causing a default
"devaluation" but I doubt that Bank Negara would allow any policy which
would be so  transparent or significant. Otherwise, some of us will be
making tons of money on the currency market & in doing so might cause
Bank Negara & the treasury a lot of heartache. Again, value (wrt to
other currencies) is
determined basically by fundamentals. There may be  short term
fluctuations/manipulations but they can't buck the market.