Tuesday, July 29, 2014

Super Fun Economic Review – Part 2: Partying with Jack Daniel like it's 1999!

As stated in my previous post, both Saenuri lawmakers as well as the Ministry of Strategy and Finance wants to see “adjustments” made to the value of the Won. It's their way of saying that they want to see the value of the currency depreciate.

Well, why does a currency appreciate in the first place? Simply put, it occurs because the currency is in demand. For example, if a country exports a lot, the demand for that currency will go up. There are, of course, other reasons, too, such as increasing (or at least stable) interest rates, an increase in per capital income, a stable government, etc.

So, the value of the Won has been relatively quite high over the past few months.

However, a few really big things have been happening in the world over the past few years that are beyond the Korean government's control. Since 2008, the United States government has injected into its economy close to US$5 trillion in stimulus money while keeping interest rates at nearly zero percent and having the world's largest debt, which has devalued the Dollar somewhat. The Japanese government recently decided to depreciate the Yen. And with several European economies having gone belly up over the past few years (see PIIGS economies), there have been calls by several European governments to depreciate the Euro, and the Euro is expected to depreciate against the Dollar in the next few months.

Congratulations!  You read through that borefest and did't get distracted by porn!  Here's your reward!  Look at those puppies!  LOOK!  AT!  THEM!
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Everyone is depreciating (or wants to depreciate) their own currencies. It's why Saenuri lawmaker Representative Kim Moo-seong said, “There is a Currency War going on in the world right now.”

So why do governments want to depreciate their own currencies? The main reason why any government would want to depreciate its own currency is for the sake of becoming “more competitive.” With one country after another going through some form of economic contraction or another, governments are trying to increase exports. And the best way to increase exports is by making sure to sell at a cheaper price than other countries. And if you can't make the product cheaper, you can make the money worth a little less.

(Side note: If depreciating a currency makes a country more competitive, shouldn't Zimbabwe be the richest country in the world?)

Move over, Travie McCoy.  I want to be a trillionaire!
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The problem with depreciation is that it's like having a shot of whiskey. Everyone who is calling for their currencies to depreciate are basically saying, "A shot would really perk me up right now."

Well, it's true. Having a shot of whiskey will definitely perk people up. But the problem with having that shot of whiskey, as any whiskey aficionado will tell you, is that you can never have just one shot of whiskey... If there is any among you who is thinking that this analogy does not work because you yourself do not enjoy whiskey, YOU SHUT UP AND DIE, YOU ABOMINATION!

The fact of the matter is that we live in an interlinked global economy and in such an economy, currencies don't rise or fall in a vacuum. For example, one complaint that the United States always raises against China is the latter's monetary policy, which has kept the Chinese currency, the yuan, artificially low. The Chinese government has pursued such a policy because it ensured that Chinese goods remain cheap, which is one of the big reasons for the trade imbalance between the United States and China. That has provided a steep incentive for the United States to retaliate by lowering its currency as well, which in effect, it has done.

Yet another reward!
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Countries around the world often see currency wars as a zero-sum game. In reality, it is really a lose-lose game for everyone. For example, unstable exchange rates can deter international investment and slow economic recovery. And of course, currency wars can have secondary political effects as well. Though this may admittedly be a case of post hoc ergo propter hoc, when was the last time that the American and Chinese governments have ever seen eye-to-eye on anything?

So going back to the whiskey analogy, it turns out that people aren't just slamming down whiskey shots just to perk up a bit. They are actually in a drinking competition that's being hosted by Delta Tau Chi (Who got that reference, huh?) and everyone's trying to out-drink each other. And the drunker they get, the more irritable the contestants are getting.

Now it may be an incontestable fact that Jack Daniel's is the best goddamned drink on this side of the Milky Way Galaxy but it is also true that spending a bit too much time with him usually gets people into all manners of trouble.

Just ask this guy!
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Oh, but what is this that I hear? A question from the audience?

“But, John, aren't you by definition saying that as long as people slam down their shots of sweet, sweet Jack Daniel's nectar in moderation, it will perk people up and they won't ever have to worry about getting arrested for indecent exposure in a public park in the presence of four minors and their very angry mothers and one dad? Then isn't it also true that depreciating a currency in moderation can actually work to stimulate an economy, too?”

Well, firstly that's a terrific question, hypothetical reader who is actually really me (and no, it is not sad at all that I am having a conversation with myself).

The answer to the question as to whether or not depreciating a currency works to stimulate an economy is this – Yes and no.

Depreciation works if prices and wages don't adjust to the new economic conditions. For example, let's say that you're a citizen of Country A and you make A$1,000 a month. Now it so happens that your country trades with Country B. It also so happens that in order to improve economic conditions, your country's government decides to depreciate your currency. So, in the past, if your A$1,000 was worth B$1,000, now your A$1000 is only worth B$500.

In this new situation, citizens from Country B can afford to buy more of your things. Now if the prices of your goods and your wages remain the same, depreciation will absolutely work as those suckers from Country B (who conveniently aren't depreciating their own currency for no other reason than to let this hypothetical example work; ceteris paribus, bitch!) stops buying their own stuff and continues to buy your stuff! But it will only work temporarily.

“Temporarily” is a very important qualification.

Has this blown your mind yet?
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It will only work temporarily because eventually, inflation always catches up to depreciation. Let me explain. When the value of your country's currency is artificially depreciated, other people's demand for your goods will go up. And one of the laws of supply and demand is that if demand goes up, so does price.

What that means specifically for you is that your monthly bills are going to come out higher than you're used to. And when prices go up and enough people get upset about it (Hello, labor unions!) it's not long before wages also go up until it catches up with the price and then some.

So, just like slamming down shot after shot after shot of Jack Daniel's, it's not a matter of whether or not a little currency depreciation will perk you up. It's a matter of how long you get to have fun before you wake up the next day with no memory of why you thought it was a great idea to drunkenly text your ex-girlfriend who has been happily married for the past three years that you still love her thirty-eight times while lying next to a one-legged hooker. Not to mention the massive hangover.

Someone should make this app RIGHT NOW!
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But that's where democratically elected governments come in. Every politician wants to get elected and they want to stay elected. So whenever the hangover is about to set it, they have good news for us partiers! Just a little hair of the dog and you're good to party again like it's 1999!

That hair of the dog usually includes more currency depreciation and more economic stimulus packages. But as anyone who has ever had a destructive love affair with Jack Daniel's can tell you, after a while, even the hair of the dog can't perk you up. You will also need at least a pack of Marlboro’s (Hello, lowered interest rates!) and if it's bad enough, Adderall (Hello, quantitative easing!).

What you slowly begin to realize, however, is that your body is silently pleading for you to stop. You need solid food. You need water. And you need sleep. You need time to recover. You realize that your stress levels are getting higher, your brain function is slowing down, and all that booze and drugs is burning a hole in your checking account, which means that you have to call mom and dad to ask for more money.

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Now you're in a rut. To reduce your stress levels, you need money so that you can pay your rent and not get evicted; but to do that, you need to call mom and dad to ask for more money and explain to them how you misspent their money (that they had to take out in loans from Repos-R-Us Bank) on booze and drugs instead of studying in the library to get that 4.0 GPA that you swore to them that you would get if they would only just bite the bullet and send you to this overpriced Ivy League college campus.

Now you're having second thoughts. Telling them about all those stupid things you did would disappoint them, break their hearts, make them lose faith in you, anger them, and hurt them. Worse yet, they might stop sending you money and force you to move back in to your old bedroom and get a job at the local paper mill where the highlight of your day will be watching reruns of “The Bold and the Beautiful” on your union-approved hour-long lunch break with those other middle-aged factory lifers who don't like yer kind with all that mumbo-jumbo book learnin'.

Talk about getting stuck between a rock and a hard place, right?

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This sort of thing also happens in economies and there's a name for it – stagflation. And it's no fun. If you don't believe me, ask Jimmy Carter.

Before you know it, you've become a junkie and have resorted to stealing (Hello, Taxes Against Corporate Surplus Profits!).

So what's the real solution? Well, unfortunately, the real solution is economic as much as it is political. Do you trust the government to have enough discipline to depreciate the currency only when it is absolutely necessary, and not do it any time it is expedient? Do you trust that the stupid college kid really has the willpower to go to only one Delta Tau Chi-sponsored Drinkathon and then spend the rest of his time to make sure that he graduates with a summa cum laude? Or do you think there has to be strong rules and strict morals?

As for me, I don't trust those bastards. But that's just my opinion.

To quote Gandalf the Grey - Fly, you fools!
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