What happens when currencies lose value?
Summary
Since the abandoniabes of gold standards by all countries, currencies have just made money, that is, the means of exchange, without their own independent value but which is repaired by the publisher countries or felt by people who use it. […]
Since the abandoniabes of gold standards by all countries, currencies have just made money, that is, the means of exchange, without their own independent value but which is repaired by the publisher countries or felt by people who use it. Thus, they can lose their relative value in two ways – by referring to other stronger currencies, or for the goods and services they can buy, the first is called the final devaluation and inflation. However, this is not a separate but intertwined financial phenomenon, and they are not limited to one country, given that we are currently trading in the global market.
Devaluation is, as a regulation, sanctified by the government, which, through the central bank, reduces the value of the national currency against other currencies, improves the new exchange rate. Why will it act this way? To compensate for the argument out of capital or the trade deficit, requires its citizens to limit their import purchases and buy more domestic goods, hoping to obtain a trade surplus in the end. But given that the value of money is also a problem of perception, if currency traders feel that currency weakens, they can sell it for foreign exchange reserves from relevant countries and require the government to reduce the value of the currency. In addition to the trade deficit, the budget deficit can also cause devaluation, if the resort government to print more money to pay its debt. An excessive supply of money causes inflation, where the purchasing power of the currency will decrease, and so is the value of foreign currency or gold, which means re-devaluation.
What happens when the currency losses value? Well, it affects the entire financial system, therefore a wealth of a country. There are only three financial sectors where money can be invested and profit made: Bond market, FX and precious metals. What happens with bonds in such a scenario? Bank assets are only valuable as far as the currency where they are declared to maintain their value, because the nominal value of the bond is assessed by conversion into a currency. But with the sovereignty of all western states expressed in trillion dollars, bonds are only paper. So the owner of the bond will sell it for those from a better state or just buy gold. The same thing will happen to the FX market: When currency traders are faced with weakened currencies, they go for a stronger, or, if nothing, they will use the same hedge: gold.
The main problem is a large devaluation of the US dollar which is a global trading currency and global reserve currency. Because of the devaluation, all commodity prices and services are increasing; That is why, for example, oil has reached a record highlight lately. On the other hand, the central bank, the currency spent is supported by the dollar, must sell dollars in exchange for stronger currencies or gold. Both the central bank and people will buy gold as a fence against the weakening dollar further that American debt that continues to increase is likely to cause.