Tuesday, June 14, 2016

Why Fiat Currencies Are Being Devalued
"Why are most governments/central banks trying to devalue/depreciate their fiat currencies? After all, devaluing the currency reduces the purchasing power of everyone who holds the currency, meaning that the currency buys fewer goods and services. This loss of purchasing power makes everyone who must use the currency poorer.
Why do governments/central banks pursue a policy that makes their citizens poorer?
There are two primary reasons why governments seek to devalue their currency:
1. To make the nation’s exports cheaper, i.e. more competitive, in the belief that expanding exports will make the overall economy grow, despite the fact that devaluing the currency makes imports more expensive, hurting everyone who buys imports.
2. To make it easier for debtors to service their loans. As our currency loses its value, we experience that loss of purchasing power as inflation: the prices of goods and services rises as the purchasing power of the currency declines. Governments/central banks presume that wages will rise along with the prices of goods and services. This rise in wages will make it easier for debtors to service their debts, i.e. make their monthly payments. In a system that depends on the expansion of debt to fuel consumption, making it easier to service existing debt is of critical importance: if debt becomes more difficult to service, debt expansion slows and so does consumption. As consumption slows, the economy slides into recession.
As their currency is devalued (by intention or by unintended consequences), the great problem for many people will be transferring their remaining financial wealth out of depreciating currencies into a more stable currency or into assets in a more stable nation."
- Charles Hugh Smith*
link here to the reference

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