NIRMA UNIVERSITY INSTITUTE OF LAW
Course: Economics III
B.A LLB(Hons) Semester - IV
Submitted by :-
Submitted to :
Anklesh Kumar
Dr. Ritesh
Shah 11bal008
DECLARATION
The text declared in the project is the outcome of my own efforts and no part of this report has been copied in any unauthorized manner and no part in it has been incorporated without due acknowledgement.
Anklesh Kumar 11bal008
Nirma University
Ahmedabad
CERTIFICATE
This is to certify that Mr. Anklesh Kumar, Roll No. 11bal008 has completed a project on the topic titled as “Devaluation of dollar in the subject of Economics-IV as a part of their ”
curriculum. This is his original work.
Supervisor:
Dr. Ritesh Shah
Course Co-Ordinator
Institute of Law
Nirma University
CKNOWLEDGMENTS
I would like to express my gratitude towards my mentor Prof. Dr. Ritesh Shah for his invaluable advice, guidance and patience over this project. I would also like to acknowledge Institute of Law, Nirma University for providing me the opportunity to prepare a report on an issue which needs awareness for the welfare of our society.
INTRODUCTION The Gold Reserve Act , dated January 30 , and the subsequent action taken under the Presidential Proclamation of January 3, I wear at least a temporary halt to demean - ing deliberate dollar authorized by the Act of May I2, I933 . Since the proclamation states that the weight of the gold dollar was reduced to I5- 2N - grains of gold standard " to stabilize domestic prices and protect trade abroad against the negative impact of foreign currency - ciated "it is reasonable to assume that the degradation process will not happen later if the desired goals are set. If, however , we are involved in a currency war with other nations who do not want or can not accept positions in which they find themselves, or, as has happened several times since last summer, wholesale prices of commodities , after a temporary increase , respond belatedly and just slightly stimulant administered them , it seems likely that further reductions will be made in the weight of the dollar. in other words , it may be that the dollar has reached only a temporary place of rest and will soon be reduced to a point near the limit of fifty cents authorized by law adopted last May . Even a temporary movement in the direction of stabilizing the dollar was greatly needed if the industrial recovery was to continue without using wildest inflation measures , is best represented by the price action of obligations which, return of confidence , have increased at a greater than that achieved at the forefront of the recovery level of last spring . When the government began its gold purchases in October , at prices consistently high in order to depreciation of the dollar , the bond market suffered a severe reaction and finally the demand for government bonds almost disappeared. At least two days in November offers were so few that the sale of $ 50,000 in government bonds U.S. depressed the price of a quarter of one percent , enough , in a way that moves thirty seconds of a point, to deter a seller to offer other meetings. Since heavy government funding was in the offing , these conditions can not be allowed to continue ; and accordingly the price fixed for the purchases of gold has begun to stabilize and changed only slightly until the end of January. The effect on the bond market was almost immediate , and a recovery in bond prices began. This course continued since the adoption of the devaluation is taken to mean stabilization. With fifty-nine percent dollar devaluation has given us, it is certain that the permanent and not just temporary stabilization would also be ensured if - stability of the monetary unit was the counterpart of control in all government policies . In the old parity , balance of international payments of the country was in his favor ; and our stock prodigious gold
, the largest in the world, was more than sufficient for all possible needs if our public finances have been handled with ordinary prudence . Attacks against ex - dull dollar one hundred to one hundred was im - pregnable; and the only danger came from Washington, where, after a series of huge deficits, the administration was about to embark on policies calling for even greater spending. Although the dollar has proved difficult to depreciate when the policy of inflation debasement was adopted last May. Although gold payments were suspended , the export of gold was prohibited , devaluation at a level of fifty cents legalized , a large reserve credit expansion started hitting unlimited money at a rate determined by President expected, and a discretionary issue three billion greenbacks allowed, the depreciation of the dollar exchange remained so moderate that in October, the government has actively discrediting its own currency by adopting the procurement policy of gold price increases that had nothing to do prevailing rates. In addition to all this, the colossal expenditure policy was underway, in which billions were treated as trifles, or, as the money in the time of Solomon , were considered " like stones " and " nothing -ment represented . " These things have destroyed an ordinary currency , perhaps one that has ever existed , but the dollar has so valiantly resisted them , even if the devaluation of fifty to nine hundred took place , it has persisted for some time in selling higher numbers but the stability of the monetary unit is obviously not the main objective , and the future of the dollar devaluation will depend primarily " on the price of commodities.
STATEMENT OF PROBLEM
The Devaluation of the dollar has not taken place on a scale to affect the world economy.
Dollar being the majorly used currency in the world will impact most of the world economies.
OBJECTIVES
The objective of this research is to identify the factors responsible, the effects, and the conditions under which a country plots to devaluate its currency.
HYPOTHESIS
The US government will never devaluate the dollar
RESEARCH QUESTION
What are the factors responsible for devaluation?
What effect does devaluation have on world economy?
What are the conditions for devaluating?
RESEARCH METHODOLOGY The research done is doctrinal and books, articles on the subject matter available on WTO and its impact on agriculture have been referred.
THE FACTORS RESPONSIBLE FOR DEVALUATION Countries to devalue their currencies only when they have no other way to correct past economic mistakes - whether their own or mistakes committed by their ailments predecessors.The a devaluation are still at least equal to its advantages. True, it does encourage exports and discourage imports to some degree and for a limited period of time. As the devaluation leads to a rise in inflation, even this temporary relief is eroded. In a previous article in this paper I described why governments resort to such a drastic measure. This article will discuss how they do it. A government may be forced to devalue by a trade deficit ominous. Thailand, Mexico, the Czech Republic - all devalued strongly, willingly or unwillingly, after their trade deficits exceeded 8% of GDP. It may decide to devalue as part of a package of economic measures is likely to include a wage freeze on government spending and the fees charged by the government for the provision of public services. This in part has been the case in Macedonia. In extreme and when the government refuses to respond to signals of economic distress in the market case - it may be forced devaluation. International and local purchase foreign currency government until its reserves are exhausted and there is no money even to import basic foodstuffs and other necessities speculators. Thus coerced, the government has no choice but to devalue and buy the very expensive exchange he sold to speculators cheaply Generally, there are two known exchange rate systems: the floating and fixed. In the floating system, the local currency is allowed to fluctuate freely against other currencies and its exchange rate is determined by market forces in a domestic (or international) market unregulated exchange. These coins need not be fully convertible, but to a certain extent, of free convertibility is a sine qua non. In the fixed system, rates are determined at the central level (usually by the Central Bank or by the Currency Board where it supplants this function of the Central Bank). The rates are determined periodically (usually daily) and rotate about a "peg" with very small variations. Even in floating rate systems, central banks intervene to protect their currencies or move them to a favorable exchange rate deemed (in the economy) or "fair." The invisible hand
of the market is often handcuffed by "We-Know-Better" Central Bankers. Variable rates are considered a protection against deteriorating terms of trade. If export prices fall or import prices surge - the exchange rate is automatically adjusted to reflect
the
new
currency
flows.
The
resulting
devaluation
restore
rates
equilibrium.Floating are as good as a protection against (speculative) foreign capital "hot" looking to make a quick killing and disappearing. As they buy the currency, speculators will have to pay more due to upward adjustment in the exchange rate. Conversely, when they will try to cash in their profits, they will be penalized by a new exchange rate.So, variable rates are ideal for countries with volatile export prices and speculative capital flows. What characterizes most emerging economies (also known as the Third World). It seems surprising that only a very small minority of states which has until one recalls their high rates of inflation. Nothing like a fixed rate (coupled with consistent and prudent economic policies) to quell inflationary expectations. Fixed exchange rates also help maintain a constant level of foreign exchange reserves, at least as long as the government does not deviate from the good macro-economic management. It is impossible to overestimate the importance of the stability and predictability that are the result of fixed rates: investors, entrepreneurs and traders can plan ahead, protect the coverage and focus on growth in the long term. It is not that a fixed exchange rate is forever. Currencies - in all types of systems for determining rates - are moved against each other to reflect new economic realities or expectations relating to these realities. Only the pace of change in exchange rates is different.Countries
invented
many
mechanisms
to
deal
with
exchange
rates
fluctuations.Many countries (Argentina, Bulgaria) currency boards. This mechanism ensures that all local currencies in circulation is covered by foreign exchange reserves in the vaults of the central bank. All government and Central Bank alike - can not print money and must operate within the straitjacket. Other countries peg their currency to a basket of currencies. The composition of the basket is supposed to reflect the composition of international trade of the country. Unfortunately, this is only rarely and when this is the case, it is rarely updated (as is the case in Israel). Most countries peg their currency baskets arbitrary currencies in which the
dominant currency is a "hard, reputable" currency such as the U.S. dollar. This is the case with the Thai baht. In Slovakia, the basket is composed of only two currencies (40% in dollars and 60% DEM) and the Slovak crown is free to move 7% up and down in the cage to wear. Some countries have a "crawling peg". It is an exchange rate linked to other currencies, which is slightly changed daily. Currency is devalued at a rate fixed in advance and brought to the attention of the public (transparent). A close variant is the "crawling band" (used in Israel and some South American countries). The exchange rate is allowed to move within a group, above and below a central peg which in itself depreciates daily at a preset predetermined rate rate.This reflects a planned real devaluation above the rate of inflation. The problem is that this system creates a growing disparity between the stable exchange rate - and the level of inflation coming down slowly. This, indeed, is the opposite of devaluation - the local currency appreciates, becomes stronger. Real exchange rate strengthened by 42% (Czech Republic), 26% (Brazil) or 50% (Israel until lately, despite the fact that the system of exchange rates, it is hardly fixed) . This has a disastrous effect on the trade deficit: it balloons and consumes 4-10% of GDP. This phenomenon does not occur in non-stationary. Especially benign are the crawling peg and crawling band systems that keep pace with inflation and do not let the currency appreciate against the currencies of major trading partners. Even then, the important question is the composition of the basket peg. If the exchange rate is linked to a major currency - the local currency will appreciate and depreciate with this major currency. Somehow inflation is the main currency and imported by the exchange rate mechanism. This is what happened in Thailand when the dollar strengthened in the global markets. In other words, the system design and pegging the exchange rate is crucial. In a system of fluctuation - the wider the band, the less the volatility of exchange rates. The European Monetary System (EMS - ERM), known as "The Snake", had to realign a few times during the 1990s and each time the solution was to widen the bands within which the exchange rate were allowed to fluctuate. Israel had to do it twice. On June 18, the group has doubled and the Shekel can rise and fall of 10% in each direction.
But fixed exchange rates offer other problems. The real exchange rate strengthening attracts foreign capital. This is not the kind of foreign capital that countries seek. It is not foreign direct investment (FDI). It is speculative, hot money in pursuit of ever higher yields. It aims to benefit from the stability of the exchange rate - and high interest rates paid on deposits in local currency. Let's look at an example: if a foreign investor were to convert 100,000 DEM to Israeli Shekels last year and invest in a liquid deposit with an Israeli bank - he will eventually earn a 12% interest per year. The exchange rate has not changed significantly - so it would have needed the same amount of shekels to buy his DEM back. On his Shekel deposit he would have earned between 12-16%, all net profits, tax free. No wonder the foreign exchange reserves of Israel doubled over the previous 18 months. This phenomenon has occurred in the world, from Mexico to Thailand. This kind of foreign capital increases the supply of money (it is converted to local currency) and - when it suddenly evaporates - prices and wages collapse. Thus, it tends to exacerbate the natural inflationary deflationary cycles in emerging economies. Measures such as controlling capital flows, taxing them are useless in a global economy with global capital markets. They also prevent foreign investors and distort the allocation o f economic resources. The other option is "sterilization": selling government bonds and thus absorbing the monetary overflow to maintain high interest rates to prevent capital flight. Both measures have adverse economic effects, tend to corrupt and destroy the banking and financial infrastructure and are expensive while providing only temporary relief. When systems are applied at variable rates, wages and prices can move freely. Market mechanisms are trusted to set the exchange rate. In fixed rate systems, taxes move freely. The state, having voluntarily abandoned one of the tools used in the end of the economy (exchange rate) setting - must resort to fiscal rigor, tightening fiscal policy (= collect more taxes) to remove liquidity and curb demand when foreign capital flowing in. In the absence of fiscal discipline, a fixed exchange rate will explode in the face of policy makers, either in the form of forced devaluation or in the form of massive capital outflows.
After all, what's wrong with volatile exchange rates? Why should they be fixed, except for psychological reasons? The West has never prospered as it does today, in the era of floating rates. Trade, investment - all economic sectors that were supposed to be influenced by the volatility of exchange rates - have a big bang continues. That small daily fluctuations (even in a devaluation trend) are better than a big devaluation of time to restore the confidence of businesses and investors is an axiom. There is no such thing as a pure floating rate system (Central Banks always intervene to limit what they see as excessive fluctuations) - is also agreed on all economists. The management of the exchange rate is not a substitute for practice and macro-and microeconomic sound - is the most important lesson. After all, money is a reflection of the country where it is legal. It stores all data concerning this country and their evaluation. A currency is a unique set of past and future, with serious consequences on the present.
DEVALUATIONS
EFFECT
ON
THE
GLOBAL
ECONOMY The frequent statement that one of the effects of the depreciation of the U.S. dollar would have a stimulating our exports and imports of our retardation Do not Be Beens recognized. It is true that a depreciation of the U.S. dollar tends to bring an increase in the dollar price of our imports and a lower foreign exchange rate for the buyers of our exports. While in all, who were the devaluation of the work out itself influenced the time but other operations were aussi strengths, and they operated with power, so that the
recording of our exports and imports Does not reflect the expected results of the devaluation of the dollar. The moving equilibrium prices and quantities of internationally traded commodities are the resultant of all the power in the operation in a given period. Thesis of influences, devaluation of the dollar is a goal. It is in fact an effect to influence all tend, without exception, the prices of all products traded internationally. This exchange rate is dependent on the extent to which dollar devaluation has-effective against the currencies of the countries of origin and import of thesis article. These do not replace price depends on the extent of the devaluation of the right dollars in gold, as other currencies-have aussi effective depreciation of the dollar, the prices can influence can be verified, can be accurately balanced, or offset by other price-operative will make forces. To some of these other forces: as recovery of industrial production potential substitution, limiting programs and national (or international) price controls are thinking down there. The U.S. dollar has declined in 2007. This follows several years of further dollar weakness. Without apparent end in sight for the falling dollar, it is a good question to ask economic consequences for other countries. 1 U.S. exports become more expensive cheaper. Therefore, there is an increase in the demand for U.S. exports. This helps boost U.S. AD 2 U.S. consumers find imports more expensive. Therefore, it is a drop in demand for imported goods. Could this be to lower growth in other countries, especially those that rely on exports to the U.S.: how China. Note: U.S. is the world's largest import. Therefore, if U.S. consumers reduce their importation is there a significant impact on other countries. However, the impact may be less than it was on the rise in Indian and Chinese consumer spending. 3 A falling dollar Mai, because inflation in the U.S.. This is because AD is higher imports more expensive and American companies have less incentive to May in order to save costs. Since the U.S. into recession heading Potentially. The increase in AD may be a good thing for the U.S. economy and thus the rest of the world. Would an American recession due to the slowdown in global growth has devaluation May to stop this. 4 Reduce the U.S. current account deficit. It shoulds aussi for reducing the current account surplus Chinese. Some help for this reduce Mai Reviews some of the economic imbalances in the world economy.
All 5 countries experiencing much May export to the U.S. a decline in economic growth. The Chinese government is worrying about this situation. There is a reason why they are trying to prevent appreciation of the yuan too much.
Evaluation of a Falling Dollar • The effects of devaluation depends on the elasticity of demand for exports and imports.
If demand is relatively inelastic then an increase in the prices of imports can not decrease the value very much. If this is the case, the effects of a devaluation dollar will be limited. • There are many other factoring all the impact on economic growth. A devaluation in May to
reduce AD boost to the growth in the U.S. and other countries. For example, if the U.S. housing market continued to fall then would fall consumer spending and thus U.S. AD does not increase dignity, the U.S. could still experience a recession.
CONDITIONS FOR DEVALUATING
The value of a currency is determined by reference to the value of other currencies to know how much of the other currency can be bought by a unit of your home currency. In general, the rate of this currency pair and fluctuates over time with currencies gain or lose value against another. When a currency reduces its value against other currencies, this process is called devaluation. Devaluation is a natural process in the history of financial markets. All currencies reflect their exchange rates falling and rising and if 10 British pounds could buy, say, $ 20 a year ago today, the book could be devalued and its purchasing power would be enough to buy only $ 15. Unlike the devaluation market, governments around the world sometimes resort to devaluation as a tool to protect their trade balances. Thus, the local currency is devalued and forced its exchange rate
against other major currencies is reduced while the restrictions are often imposed to prevent the home currency can be exchanged at higher rates. These types of government intervention in the foreign exchange market is a perfect example of the official devaluation while the devaluation of natural market is often referred to as depreciation, a process where exchange rates fluctuate downwards. In both cases, the country whose currency is devalued could benefit form the lower cost of its exports of goods, which are now cheaper to buy by customers are countries whose currencies are stronger. The history of trade recalls many examples of intentional devaluation in order to conquer new markets through lower exchange rate of the currency devaluation. One of the biggest waves of the devaluation of the story was in the 1930s when at least nine of the world's major economies devalued their national currencies, including Australia, France, Italy, Japan and the United States . During the Great Depression, all these nations have decided to abandon the gold standard and devalue their currencies up to 40%, which helped revive their economies and stable exchange rates. Meanwhile, in Germany, who lost the Great War a decade earlier, was responsible for paying reparations painful war and intentionally caused hyperinflation process in the country. Thus, the Germans witnessed the largest ever devaluation of the national currency and the exchange rate has bottomed. At this time, the rate of the German mark to the U.S. dollar exchange amounted to several million or billion marks to the dollar. On the other hand, the devaluation helped the German government to cover its debts to the winners of the war, although the average Germans paid a devastating price of this government policy. Governments around the world are often tempted to artificially lower the exchange rate to benefit from the lowest value of the national currency. The value of the weak currency encourages exports and discourages imports increase the deficit and trade imbalances of the country. However, the average citizen of a country with a currency devalued recently could suffer from higher prices of imported goods and the cost of holidays abroad.
CONCLUSION
The only lasting solution to the problem, thus, seems to be a faster growth of exports. The possibilities are immense. The rate of growth of US exports is considerably lower than that of world exports. Thus, from 21 per cent in 1956, the US share of world exports declined sharply to 16 per cent in a matter of a decade. It should also be considered that exports account for only 5 per cent of the US GNP, while the corresponding figure is 11 per cent for Japan, 15 per cent for France, 19 per cent for Italy, 20 per cent for the UK and 21 per cent for West Ger-many. It is still higher for some com-paratively less developed countries, viz, 30 per cent for Denmark, 31 per cent for Switzerland, 37 per cent for Belgium and 44 per cent for the Nether-lands. This implies the possibility of at least a doubling of US exports. But this cannot materialize unless American goods are made more competitive in international markets by devaluing the dollar. In fact, devaluation of the dollar has become inevitable. To sum up, the US balance of pay-ments deficit has become chronic. US gold stocks have now reached an all-time, low. At the same time, the US cannot cut its imports substantially in view of its commitment in the Vietnam war. Nor can it reside from its pledge to participate actively in the economic development of underdeveloped areas without undermining their faith in it and thereby spoiling its international image. Restrictions on the flow of private capital too will not be in US interests. The only way open to the US thus is to muster all its energies to boost its exports. But this cannot happen unless the dollar is devalued
.
