From: chedley@carthago.intel.com (CHEDLEY_AOURIRI)
Newsgroups: sci.econ,misc.invest
Subject: Re: need details on devaluating U.S. currency
Date: 4 Sep 92 01:08:02 GMT
Reply-To: chedley@carthago.intel.com (CHEDLEY_AOURIRI)
Followup-To: sci.econ
Distribution: usa
Organization: Intel-Corp,_Hillsboro,_Oregon

In article <5esJ03Tu76p100@amdahl.uts.amdahl.com>, fierro@uts.amdahl.com (Doug Fierro) writes:
...
|> 
|>   It seems to me that devaluation of the dollar doesn't affect people much
|> if they are not buying anything outside of this country- i.e. their salary,
|> car loan, mortgage, etc. won't appear to change much, but if they want to
|> buy that Mercedes or French wine or round-trip ticket to Tokyo the cost
|> will be much more than before the devaluation took place.  So if this is

A devaluation of the dollar does affect people even if they do'nt directly
buy anything outside this country.
For one thing, many goods you buy in this country are either imported
or have some parts in them imported from other countries.
Second, even if you buy a product 100% made in this country, devaluation
does affect its price by making it relatively more or less attractive
then similar products from foreign countries.
Take cars for example. If a $ devaluation makes japanese cars more expensive,
people will tend to turn more to american made cars. Ie the demand for 
american cars rises which tends to push their price up!!!

|> true, then if other leading countries decide to devaluate their currency
|> as well, does that defeat the purpose and can it lead to a devaluation war?

Yes, devaluation wars do occur.
However, in a fixed exchange rate system, smart central bankers can precisely 
devaluate a currency so that it keeps their exports competitive without 
triggering a retaliation (counter devaluation) from the other countries.

|> I can see that devaluating one's currency makes their products more attractive
|> to purchase by foreigners, but the trade-off is foreigners will not want
|> to invest much in that country, and I don't believe the U.S. can afford to
|> start discouraging foreigners from buying our debt in our current situation.

Well, low interest rates discourage investors from buying US debt. Which may
be good for the US, as it will encourage the govt to balance its budget...

|> But then again, if the U.S. can cut it's debt enough by devaluating the
|> dollar, it might be an acceptable trade-off.  If this is not entirely correct
|> let me know- details of course where I went wrong :-)
|> 
That is correct. 
But it has some long term implications that may not be very pleasant.
If the US tries to cut down its debt load by devaluating its currency (basically
by printing more dollars), it will:

1- Scare off investors and govt bond holders, who will decide not to buy any
   more US govt bonds. The US treasury cannot afford that, given the huge
   amount of deficits the govt is running which necessitate loads of money
   to borrow.

2- Reignite inflation, with all its negative consequences on the economy
   in this country and all over the world.
   This is probably a political argument, as politicians may opt for this
   "solution" as the easy way out of the deficit problem.

..CHEDLEY..
..!{uunet|tektronix|ogicse}!littlei!chedley    chedley@carthago.intel.com     
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Standard Disclaim: The above statements and opinions are strictly mine,
and do not represent any company or organization's position.
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Newsgroups: sci.econ