Floating coins Are they really able to swim and float?
When talking about currencies and the mechanisms of the central bank in managing them through open market operations in the stock market, financial markets, interest rates, and taxes, an ambiguous headache may revolve in our minds. It is difficult for us to understand these terms and tools also how they work and how they affect the purchasing power of our currency directly and indirectly to maintain the financial balance. And cash. But all of this suddenly evaporates when we hear the word (float currency). Here, the first and closest thing in our minds is a banknote swimming in the sea or trying to float and escape from drowning.
In fact, the flotation (although its harms to people are severe and difficult) has advantages and advantages, especially in industrialized countries that export goods and products. Although the flotation loses part of its value and strength, which enables people to buy and sell goods and services locally, it improves Exports and reducing the trade deficit in the balance of payments if the float is managed properly.
However, what are the disadvantages of the flotation before talking about its positives and effects?
In fact, what was the definition of the term floating currency in the first place?
Let's talk at the outset (briefly) about the concept of currencies. Currencies are a mediator acceptable to the general public in any surroundings or region through which goods and services can be evaluated and exchanged with them with a fair value called (prices). The price is the number that expresses the total costs Preparing and providing these goods and services in addition to profit margins and taxes imposed on them (if imposed).
In the beginning, these coins were materials that were scarce in nature, such as gold and silver, and in some civilizations, coins were coffee beans and shells. The purpose of the fact that these currencies are characterized by scarcity is their scarcity, scarcity of resources, or their limitations, when the currency is of an infrequent or limited characteristic, its value will be low because all people will be able to obtain it, and this will make its purchasing power decrease with the stability of the value of goods, so prices will rise, causing a phenomenon called (inflation ).
Note: Inflation has many causes that are not limited to the abundance of currency, but rather is one of its factors, phenomena, and causes.
With the development of time and civilizations, payment methods and forms of currency developed, so currencies became financial instruments called money guaranteed by the state or government financial body with a specific value that this body undertakes to exchange these instruments for their holders with what their value is in gold or silver whenever they want to do so without any obstacles.
During the early years after World War II, the Bretton Woods system worked well and with the existence of the Marshall Economic Project for the reconstruction of Europe after the end of World War II, which was established by General George Marshall after becoming US Secretary of State, there was a demand for dollars to spend on American goods - cars, steel, and machinery. And others, and because the United States, which has half of the world's official gold reserves, estimated at 574 million ounces at the end of World War II - the system remained safe.
This agreement also means that the United States cannot carry out new cash issuances without securing a parallel golden cover equivalent to the value of the money that will be issued. Otherwise, the dollar's value will begin to erode and decline.
But in reality, the United States did not abide by this condition, especially when the United States was fighting a war in Vietnam. Between 1965 and 1975, the United States spent $ 168 billion on the war ($ 1.02 trillion in the 2015 fiscal year), and this led to a large deficit in the federal budget, which prompted it to print more dollars without taking into account the golden cover.
As usual, the United States needed more dollars to cover the costs of the war, but the dollars were not enough because the gold in the United States (and indeed the world) was no longer sufficient to cover the US dollar. It is no longer possible to print more dollars because the existing gold is no longer sufficient to cover it. Thus, the United States exceeded the maximum limit of printed dollars and printed dollars that were not covered with gold without letting anyone know about it.
But the major crisis occurred when French President Charles de Gaulle demanded in 1965 to convert the US dollars held by the French Central Bank into gold (he demanded that $ 191 million be converted into its equivalent of gold, and the price of an ounce was $ 35), in accordance with the Bretton Woods Agreement that allows this, which led to this. The matter to the inability of the United States later to convert any US dollars into gold, which led US President Richard Nixon to issue a statement in 1973 in which he repealed the US commitment to converting US dollars into gold, later known as the Nixon Shock or the Nixon Shock
Gold became free after that, and no one could control it except supply and demand, and all currencies, including the US dollar, were standing on one land and all became mandatory paper currencies that had no value in reality except the commitment of governments to them. The value of the dollar has decreased 40 times from 1973 to now, and the price of gold has risen crazy and has become a regular commodity, like silver, platinum, and others.
Liberating the US dollar from its attachment to gold and considering that its value and strength derived from the economic power of the United States and its exclusive link to oil sales as the only acceptable currency as a broker for buying and selling made it coherent after its liberation so far and became the main currency for the reserves of countries, central banks and the rest of the banks in all countries and evaluated their local currencies accordingly. On the US dollar.
Floating currencies are defined as: making the exchange rate of this currency fully liberalized so that the government or the central bank does not interfere in determining it directly, but rather it is secreted automatically in the currency market through the supply and demand mechanism that allows setting the exchange rate of the national currency against foreign currencies, and in this case, Floating currency exchange rates fluctuate constantly with every change in the supply and demand for foreign currencies so that they can change several times per day.
Two forms of floating currencies are as follows:
As Julian Evans-Prichthard, a senior Chinese economist at Capital Economics, said that by linking the yuan devaluation to the latest tariff threats, it effectively fortifies the exchange rate even if it does not anticipate devaluation through direct intervention.
The depreciation of the yuan increases the competitiveness of Chinese exports, thus reducing the value of purchasing them in foreign currencies. From the American perspective, this step is seen as an attempt to offset the impact of raising tariffs on Chinese exports to America. While it seems in the interest of consumers around the world (who can now buy more Chinese products at a cheap price), it carries with it other risks. On the other hand, the depreciation of the yuan leads to an increase in the price of exports to China, which threatens to increase inflation rates and stress its already slowing economy. As well as pushing investors in the currency to search for another investment destination.
Pure floatation: whereby determining the exchange rate is left to market forces and the mechanism of supply and demand completely, and the state refrains from any direct or indirect interference such as Egypt and its Egyptian pound since its liberation in 2003 completely.
Directed float: so that the exchange rate is left to market forces and the mechanism of supply and demand, but the state intervenes through its central bank as needed in order to direct exchange rates in certain directions by affecting the volume of supply and demand for foreign currencies such as China and its currency, the Chinese yuan.
The central bank in a country whose currency is not liberalized (or not floating) works to fix the exchange rate of its currency against the US dollar, for example, the Gulf countries fix the exchange rate of their currencies almost constantly with very slight margins in price changes against the dollar, for example, the US dollar is its price against The Saudi riyal has an exchange rate of 3.75 Saudi riyals, and against the Emirati dirham is 3.67 dirhams, and against the Qatari riyal is 3.65 Qatari riyals.
And there are countries that resort to floating when their foreign reserves are low (the dollar or a basket of currencies such as the European euro, the Chinese yuan, the US dollar, the Japanese yen, and the British pound) when there are crises or spending on infrastructure projects such as Egypt when they spent about 4 billion dollars on the Suez Canal expansion project Officially known as the (New Suez Canal), which exhausted the state’s treasury from foreign reserves, forcing it to float the Egyptian pound at the end of 2016 to relieve pressure on the severe shortage of foreign exchange and to obtain a loan of $ 12 billion from the International Monetary Fund, which led to a big jump in Its exchange rate against the dollar ranged from 8.8 pounds to about 18 pounds.
Large industrialized countries may resort to floating their local currency to stimulate exports and reduce imports, such as China when it recently devalued its currency, the Chinese yuan (which is locally called the Chinese simply) to a level above 7 yuan for the first time in 11 years, as Beijing was keen in the past to prevent The devaluation of its currency from the symbolic level, but the recent trade war between it and Washington led to a change in its policy towards this matter, especially the United States' threats related to raising tariffs again on Chinese imports.
In fact, the flotation (although its harms to people are severe and difficult) has advantages and advantages, especially in industrialized countries that export goods and products. Although the flotation loses part of its value and strength, which enables people to buy and sell goods and services locally, it improves Exports and reducing the trade deficit in the balance of payments if the float is managed properly.
However, what are the disadvantages of the flotation before talking about its positives and effects?
In fact, what was the definition of the term floating currency in the first place?
Let's talk at the outset (briefly) about the concept of currencies. Currencies are a mediator acceptable to the general public in any surroundings or region through which goods and services can be evaluated and exchanged with them with a fair value called (prices). The price is the number that expresses the total costs Preparing and providing these goods and services in addition to profit margins and taxes imposed on them (if imposed).
In the beginning, these coins were materials that were scarce in nature, such as gold and silver, and in some civilizations, coins were coffee beans and shells. The purpose of the fact that these currencies are characterized by scarcity is their scarcity, scarcity of resources, or their limitations, when the currency is of an infrequent or limited characteristic, its value will be low because all people will be able to obtain it, and this will make its purchasing power decrease with the stability of the value of goods, so prices will rise, causing a phenomenon called (inflation ).
Note: Inflation has many causes that are not limited to the abundance of currency, but rather is one of its factors, phenomena, and causes.
With the development of time and civilizations, payment methods and forms of currency developed, so currencies became financial instruments called money guaranteed by the state or government financial body with a specific value that this body undertakes to exchange these instruments for their holders with what their value is in gold or silver whenever they want to do so without any obstacles.
To continue talking about money down to talking about the concept of floating currencies (the title of our article), we will consider the currency that we are talking about is the US dollar.
Prior to the end of the Second World War, specifically in 1944, the Bretton Woods Agreement was signed, which stipulates the commitment of the United States of America to all countries considering its currency, the American dollar, a currency denominated in a specific weight of gold. It was agreed that the price of an ounce of gold would be $ 35, thus becoming the US dollar The currency of the reserve stock of countries and banks as being denominated at a fixed and fixed price of gold, which led to the emergence of the phenomenon of financial stability, as the system established currencies in a fixed foreign exchange system with a fluctuation rate of 1% of the currency in relation to gold or the dollar and thus the United States was committed to supporting every dollar abroad with gold, which makes the foreign exchange rate fixed in relation to the dollar.During the early years after World War II, the Bretton Woods system worked well and with the existence of the Marshall Economic Project for the reconstruction of Europe after the end of World War II, which was established by General George Marshall after becoming US Secretary of State, there was a demand for dollars to spend on American goods - cars, steel, and machinery. And others, and because the United States, which has half of the world's official gold reserves, estimated at 574 million ounces at the end of World War II - the system remained safe.
This agreement also means that the United States cannot carry out new cash issuances without securing a parallel golden cover equivalent to the value of the money that will be issued. Otherwise, the dollar's value will begin to erode and decline.
But in reality, the United States did not abide by this condition, especially when the United States was fighting a war in Vietnam. Between 1965 and 1975, the United States spent $ 168 billion on the war ($ 1.02 trillion in the 2015 fiscal year), and this led to a large deficit in the federal budget, which prompted it to print more dollars without taking into account the golden cover.
As usual, the United States needed more dollars to cover the costs of the war, but the dollars were not enough because the gold in the United States (and indeed the world) was no longer sufficient to cover the US dollar. It is no longer possible to print more dollars because the existing gold is no longer sufficient to cover it. Thus, the United States exceeded the maximum limit of printed dollars and printed dollars that were not covered with gold without letting anyone know about it.
But the major crisis occurred when French President Charles de Gaulle demanded in 1965 to convert the US dollars held by the French Central Bank into gold (he demanded that $ 191 million be converted into its equivalent of gold, and the price of an ounce was $ 35), in accordance with the Bretton Woods Agreement that allows this, which led to this. The matter to the inability of the United States later to convert any US dollars into gold, which led US President Richard Nixon to issue a statement in 1973 in which he repealed the US commitment to converting US dollars into gold, later known as the Nixon Shock or the Nixon Shock
Gold became free after that, and no one could control it except supply and demand, and all currencies, including the US dollar, were standing on one land and all became mandatory paper currencies that had no value in reality except the commitment of governments to them. The value of the dollar has decreased 40 times from 1973 to now, and the price of gold has risen crazy and has become a regular commodity, like silver, platinum, and others.
Liberating the US dollar from its attachment to gold and considering that its value and strength derived from the economic power of the United States and its exclusive link to oil sales as the only acceptable currency as a broker for buying and selling made it coherent after its liberation so far and became the main currency for the reserves of countries, central banks and the rest of the banks in all countries and evaluated their local currencies accordingly. On the US dollar.
Floating currencies are defined as: making the exchange rate of this currency fully liberalized so that the government or the central bank does not interfere in determining it directly, but rather it is secreted automatically in the currency market through the supply and demand mechanism that allows setting the exchange rate of the national currency against foreign currencies, and in this case, Floating currency exchange rates fluctuate constantly with every change in the supply and demand for foreign currencies so that they can change several times per day.
Two forms of floating currencies are as follows:
But what is the relationship of a devaluation (or let us call it an increase in the float, metaphorically) of the Chinese yuan to the trade war with Washington? What is Huawei's relationship with it?
In fact, the yuan is not freely traded. The Chinese government restricts its movement against the US dollar in the markets. Unlike other central banks, the People's Bank of China is not independent and undergoes interventions when major changes occur in the interest value.As Julian Evans-Prichthard, a senior Chinese economist at Capital Economics, said that by linking the yuan devaluation to the latest tariff threats, it effectively fortifies the exchange rate even if it does not anticipate devaluation through direct intervention.
The depreciation of the yuan increases the competitiveness of Chinese exports, thus reducing the value of purchasing them in foreign currencies. From the American perspective, this step is seen as an attempt to offset the impact of raising tariffs on Chinese exports to America. While it seems in the interest of consumers around the world (who can now buy more Chinese products at a cheap price), it carries with it other risks. On the other hand, the depreciation of the yuan leads to an increase in the price of exports to China, which threatens to increase inflation rates and stress its already slowing economy. As well as pushing investors in the currency to search for another investment destination.
However, how can devaluation (or float) of the currency stimulate increased exports?
Suppose that the cost of manufacturing a smartphone in China, the Huawei nova 5i Pro, costs $ 430, i.e. approximately 2,960 RMB at an exchange rate of 6.883 RIM per $ 1. Now when the currency is devalued or floated (in this example, the Chinese yuan), the current exchange rate (the date of writing this article) is 7.15 and steadily (or a slight change) in the cost of making the same smartphone, its price in US dollars has become $ 413.98, that is, once the currency is devalued. The local price of the phone has improved by $ 16, and this of course stimulates exports more because the main currency in international trade and exchange is the US dollar.This, of course, angered the United States represented by President Donald Trump, commenting that the increased competitiveness of Chinese goods was at the heart of Trump's trade war against Beijing.
Earlier, President Donald Trump announced the ban on American companies and their alliances from dealing with Huawei, due to his fear of spy purposes using the 5G technology, before he lifted the ban on it, and it becomes necessary for licenses before returning to work and partner with it.Pure floatation: whereby determining the exchange rate is left to market forces and the mechanism of supply and demand completely, and the state refrains from any direct or indirect interference such as Egypt and its Egyptian pound since its liberation in 2003 completely.
Directed float: so that the exchange rate is left to market forces and the mechanism of supply and demand, but the state intervenes through its central bank as needed in order to direct exchange rates in certain directions by affecting the volume of supply and demand for foreign currencies such as China and its currency, the Chinese yuan.
The central bank in a country whose currency is not liberalized (or not floating) works to fix the exchange rate of its currency against the US dollar, for example, the Gulf countries fix the exchange rate of their currencies almost constantly with very slight margins in price changes against the dollar, for example, the US dollar is its price against The Saudi riyal has an exchange rate of 3.75 Saudi riyals, and against the Emirati dirham is 3.67 dirhams, and against the Qatari riyal is 3.65 Qatari riyals.
And there are countries that resort to floating when their foreign reserves are low (the dollar or a basket of currencies such as the European euro, the Chinese yuan, the US dollar, the Japanese yen, and the British pound) when there are crises or spending on infrastructure projects such as Egypt when they spent about 4 billion dollars on the Suez Canal expansion project Officially known as the (New Suez Canal), which exhausted the state’s treasury from foreign reserves, forcing it to float the Egyptian pound at the end of 2016 to relieve pressure on the severe shortage of foreign exchange and to obtain a loan of $ 12 billion from the International Monetary Fund, which led to a big jump in Its exchange rate against the dollar ranged from 8.8 pounds to about 18 pounds.
Large industrialized countries may resort to floating their local currency to stimulate exports and reduce imports, such as China when it recently devalued its currency, the Chinese yuan (which is locally called the Chinese simply) to a level above 7 yuan for the first time in 11 years, as Beijing was keen in the past to prevent The devaluation of its currency from the symbolic level, but the recent trade war between it and Washington led to a change in its policy towards this matter, especially the United States' threats related to raising tariffs again on Chinese imports.