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Thread: How would a greece-natuional currency change the situation?

  1. #1 How would a greece-natuional currency change the situation? 
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    I must start by saying that I did not study economy, and all i know I have from the internet.

    I read in the gaurdian.co.uk that an expert said that if greece had it's own currency, it could just decrease the valuta of that currency, and that would not damage the Euro's valuta (I understand this ofcourse), while not having to do cutbacks in it's own economy.
    The latter i do not understand. I don't understand how the difference between having an own currency and sharing the Euro, would change the necessity of cutbacks in greece

    Thank you.


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  3. #2  
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    Do you have a link to the article? I can't see how going back to the single country currency would mean Greece won't have to make cutbacks.


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    I would also be interested in a link

    During the great depression, the local Worgl government in Austria created its own money which resulted in great economic prosperity. The local currency was a tool without which the region was in deep trouble, but Worgl used it to foster productive activities and infrastructure, which in turn created economic activity.

    It seams that some of the problems in Greece are of a different nature and need to be fixed seperatly, the local currency tool can help if used correclty, but it will not fix some root problems.

    A few years back, some Argentinian provinces created a form of provincial money, in a nutshell it allowed them to pay for public services without borrowing at great interest, and which was much easier to pay back. It appears to be quite beneficial as was the case in Worgl.
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    Quote Originally Posted by JX
    Do you have a link to the article? I can't see how going back to the single country currency would mean Greece won't have to make cutbacks.
    If they left the Euro, they could intentionally devalue their currency. Remaining part of the Euro means they are stuck with the overall Euro valuation, and cannot take steps to make their exports more attractive, etc.

    http://krugman.blogs.nytimes.com/201...reek-end-game/
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    Quote Originally Posted by inow
    Quote Originally Posted by JX
    Do you have a link to the article? I can't see how going back to the single country currency would mean Greece won't have to make cutbacks.
    If they left the Euro, they could intentionally devalue their currency. Remaining part of the Euro means they are stuck with the overall Euro valuation, and cannot take steps to make their exports more attractive, etc.

    http://krugman.blogs.nytimes.com/201...reek-end-game/
    indeed you've responded with the link faster than i did. i think this article was the article that the gaurdian reffered to.

    I still don't fully understand it though, allthough I'm beginning to understand.

    Can't you just make the exports more attractive by selling for loewr prices, thereby not changing the valuta, but getting prices down. wouldn't that mean the same?
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    Cheaper currency = cheaper goods exported by the country. That is exactly what China does for years.
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    well, it's not the only way, or is it?
    If in greece everything costs 2 times less euro's than in germany, wouldn't that be the same as having a currency with half the valuta of the euro?
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    Quote Originally Posted by questioner1
    well, it's not the only way, or is it?
    If in greece everything costs 2 times less euro's than in germany, wouldn't that be the same as having a currency with half the valuta of the euro?
    I'm not sure if I understand. How would you make everything cost less?
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    Quote Originally Posted by Twit of wit
    Quote Originally Posted by questioner1
    well, it's not the only way, or is it?
    If in greece everything costs 2 times less euro's than in germany, wouldn't that be the same as having a currency with half the valuta of the euro?
    I'm not sure if I understand. How would you make everything cost less?
    ok. now maybe i'm getting there.
    Let's say everyone in the country knew everything about economy, and about the government's plans, hypothetically, would having a different valuta, and then devalueing the currency be the same as keeping the euro and increase taxes?
    Isn't that exactly the same, except that it looks different to the avarage worker?

    because when they're devalueing their currency, what they're basically doing is pressing more money, meaning percentagewise the goverment will have more money than the population. The same is true when they rise taxes.
    But from the perspective of a consumer who wants to buy a bread, it makes no difference if the money spent will go to the goverment via taxes, or via the government just printing new money, thereby devaluation the money of the consumer by the same margin.

    Is this correct?
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  11. #10  
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    Link the original article.
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    this is not about an article anymore.

    I understood the first question, but it posed a different question that relates to it to me:

    Let's say everyone in the country knew everything about economy, and about the government's plans, hypothetically, would having a different valuta, and then devalueing the currency be the same as keeping the euro and increase taxes?
    Isn't that exactly the same, except that it looks different to the avarage worker?

    because when they're devalueing their currency, what they're basically doing is pressing more money, meaning percentagewise the goverment will have more money than the population. The same is true when they rise taxes.
    But from the perspective of a consumer who wants to buy a bread, it makes no difference if the money spent will go to the goverment via taxes, or via the government just printing new money, thereby devaluation the money of the consumer by the same margin.

    Is this correct?
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    No. Devaluation lowers the value of all money, including all debts and savings. Higher taxes affect only new profits.
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    so if someone was not saving money, there would be no practical difference between devaluation of a national greek currency, and keeping the euro, but raising taxes?
    No difference at all?
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    What is your point?
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    so if someone was not saving money, there would be no practical difference between devaluation of a national greek currency, and keeping the euro, but raising taxes?
    No difference at all?
    questioner1;
    I'm missing you point as well, but I'll try. If Greece want's to keep with in the economy of those using the Euro and/or other National Interest (Government/Business) then it's up to them to 'so to speak' devalue the cost of Government and Debt (cut cost). If they chose to pull out (not up to date on what penalties that involves) and use a National Currency, printing money or by several other means, which increases inflation (devalues National Currency), in turn making their products and service too expensive outside Greece and making foreign competition prices more attractive. Short of isolationism (Greece dependent on others) this would increase their problem, not to mention their business moving short distances and for Ocean Transportation (main business) this wouldn't take much.

    What your not considering IMO, is that with out cutting cost, the welfare State, either way assistance would come from outside Greece. Since Greek economist know there is no means to ask for more tax support sustain the current level of debt, I'd suspect they would hope the cut in Government would soon be acceptable to the Greek Public, opposed to reorganization (bankruptcy).

    From the other side the issue; Many Nations/Business are already invested in Greece (vested interest in a solution) being a worthwhile investment, even if it breaks down in five or ten years. Though the US and several others contributing to this "BAILOUT" proposition, do little business with Greece itself, they deal with others that do and their vested interest lays in the World Economy (the domino or chain reaction possibility).
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    @ jackson33: That makes sense.

    Maybe i indeed haven't explained myself enough.
    When I listen to the economic news, they talk about valuta's going up and down, and debts, etc. but I have nearly no understanding of what a valuta going down means to the regular citizen.
    Because in the end, the economy is not about money-flow and valuta's, and such, but just about products being made and traded. In the end, if the economy is failing, that means that less products are being made, and people can't get the supplies they rely on.

    So what I want to understand, is what exactly does it mean for the regular greek citizen (and for the rest of us maybe), if greece would change it's currency, as opposed to keeping the euro, but cutting taxes, etc.

    You say, if the new national valuta of greece goes down, through inflation, that would mean their services would become more expensive, but It's the other way around right? because now 1 euro is 10 greek coins, instead of 1 euro is 1 greek coin.

    Anyway. I'm really trying to understand economy in general, and specifically this greece currency devaluation.

    Sorry for not being clear in my question. please tell me if i'm still not clear.
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    Inflating your own currency and spending it is just like taxing and then spending some of the money on export subsidies, except instead of taxing income, you're taxing wealth.

    Suppose there's a person with a million dollars, and the government decides to devalue the dollar by half. In effect, they took half his money. It's no different than if the IRS showed up at his home and seized $500,000.00 from him, except there's a lot less bureaucracy, and less kicking and screaming.

    Exported goods and services temporarily appear to have become cheaper, but your own citizens are the ones who are paying for the difference in price. It's just like when the USA exports subsidized corn to Mexico. Our corn ends up being cheaper than theirs on the market even though Mexicans are paying their workers less, but only because our farmers are receiving government subsidies that reduce their costs. In effect, the US government is helping Mexicans buy our corn by paying part of the price on their behalf.

    So, inflating currency to increase imports is a short term solution at best. If you look at the big picture, then what's really happening is that your country is trying to compete by selling below cost. It's not really profitable. It just looks that way. How long can any business continue to sell below cost before it goes bankrupt?
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    Quote Originally Posted by kojax
    Inflating your own currency and spending it is just like taxing and then spending some of the money on export subsidies, except instead of taxing income, you're taxing wealth.

    Suppose there's a person with a million dollars, and the government decides to devalue the dollar by half. In effect, they took half his money. It's no different than if the IRS showed up at his home and seized $500,000.00 from him, except there's a lot less bureaucracy, and less kicking and screaming.

    Exported goods and services temporarily appear to have become cheaper, but your own citizens are the ones who are paying for the difference in price. It's just like when the USA exports subsidized corn to Mexico. Our corn ends up being cheaper than theirs on the market even though Mexicans are paying their workers less, but only because our farmers are receiving government subsidies that reduce their costs. In effect, the US government is helping Mexicans buy our corn by paying part of the price on their behalf.

    So, inflating currency to increase imports is a short term solution at best. If you look at the big picture, then what's really happening is that your country is trying to compete by selling below cost. It's not really profitable. It just looks that way. How long can any business continue to sell below cost before it goes bankrupt?
    Thats a very enlightening explanation. I think i get it now.
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  20. #19  
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    Quote Originally Posted by kojax
    Suppose there's a person with a million dollars, and the government decides to devalue the dollar by half. In effect, they took half his money. It's no different than if the IRS showed up at his home and seized $500,000.00 from him, except there's a lot less bureaucracy, and less kicking and screaming.
    Half of savigs, half of debts.
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    "Suppose there's a person with a million dollars"
    Like everyone else here I hate it everytime my million dollar bank account looses value.


    Half of savigs, half of debts.
    Compare the US savings to the trillions of debt


    Private banks already indirectly inflate the money making everyone $ loose value, and although Im not advocating deficit spending if a government is going to spend its way into a deficit its better to issue the money and remove it from circulation afterwards as a form of repayement than to borrow at interest the money(interest which ends up inflating the debt and the interest payment to pay it back) which mean you pay taxes that goes not for the bridge but taxes to pay usury.
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  22. #21  
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    Quote Originally Posted by Twit of wit
    Quote Originally Posted by kojax
    Suppose there's a person with a million dollars, and the government decides to devalue the dollar by half. In effect, they took half his money. It's no different than if the IRS showed up at his home and seized $500,000.00 from him, except there's a lot less bureaucracy, and less kicking and screaming.
    Half of savigs, half of debts.
    True, but remember that one man's debt is another man's investment. I guess this means that, if your net worth is less than zero, inflation makes you richer. It's only if your net worth is greater than zero that you end up losing money.

    So, if your country owes a lot of people money, then inflating your currency is a good way to screw them out of part of what you owe them. (Just so long as the loans were issued in your currency instead of their currency.) But... if they're the ones who owe you money (in your own currency), then you end up screwing yourself.


    Quote Originally Posted by icewendigo

    Half of savigs, half of debts.
    Compare the US savings to the trillions of debt


    Private banks already indirectly inflate the money making everyone $ loose value, and although Im not advocating deficit spending if a government is going to spend its way into a deficit its better to issue the money and remove it from circulation afterwards as a form of repayement than to borrow at interest the money(interest which ends up inflating the debt and the interest payment to pay it back) which mean you pay taxes that goes not for the bridge but taxes to pay usury.
    And, sinister as it sounds, this is exactly what makes the US Federal Deficit sustainable. Asian countries like Japan keep hoarding US dollars and refusing to spend them in our markets. Instead they loan the money back to us to finance stuff.

    Well..... that means the loans they give us are given in US dollars, and we can trim them down anytime we want. (As long as we're willing to pay more for gasoline and other imports.)
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    It sounds to me like the entire world economy is one big counterfeit.
    Where's the logic that someone can just make his loan worth less, whenever he wants?
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    And, sinister as it sounds, this is exactly what makes the US Federal Deficit sustainable. Asian countries like Japan keep hoarding US dollars and refusing to spend them in our markets. Instead they loan the money back to us to finance stuff.
    Not exactly correct, kojax; Japanese debt, is financed primarily by the Japanese themslves, where the American Debt is primarily financed by other Countries. Then the Japanese people, have invested more than any other Country, with in the US, Toyota one of the largest.

    Well..... that means the loans they give us are given in US dollars, and we can trim them down anytime we want. (As long as we're willing to pay more for gasoline and other imports.)
    For sure this can't/won't be done in the next 10-20 years, if projected annual deficits have any meaning. In fact, we're planning on borrowing from others or inflating our own currency (inflationary) through taxing, just to keep pace, with current and increasing social obligations (Greek Problem). Gasoline prices reflect the World Market Value of Crude Oil or the Taxes collected by the States involved. In the UK, that is a converted 7-8$ per gallon, in the US 3.00-3.90 per gallon or in Iran and others Countries a converted .50 cents to 2.00 per gallon, subsidized by government.

    It sounds to me like the entire world economy is one big counterfeit.
    Where's the logic that someone can just make his loan worth less, whenever he wants?
    q; I'd suggest "entire world", is extremely complex and has been too dependant on the US economy. As for controlling the value of a loan, it's the interest charged that keeps them fluid. Currently that's just short of 5%/yr (longer term loans), but will rise in accordance to risk and the time lines involved. You can buy US T-Bonds or anybody in the World in everything from 30-60-90 days to 2-5-10-20 or 30 year notes at any offering with set limits on those interest rates. Whether the US actually turns to junk status (possible) or is perceived junk (some already feel this way), they will either not purchase those bonds (at rates offered), or sell what they have (China did, some of theirs). If the US doesn't get their act together and fast, we could be looking at 10%/yr or more, just to cover the perceived devaluation of that dollar. Remember, when China/Japan or any Government is involved, they may be financing their own economy, somewhat dependent on the Country(s) they are financing (US a big player), it's a 'give and take' to what's economically practical.
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  25. #24  
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    Quote Originally Posted by Jackson33
    Well..... that means the loans they give us are given in US dollars, and we can trim them down anytime we want. (As long as we're willing to pay more for gasoline and other imports.)
    For sure this can't/won't be done in the next 10-20 years, if projected annual deficits have any meaning. In fact, we're planning on borrowing from others or inflating our own currency (inflationary) through taxing, just to keep pace, with current and increasing social obligations (Greek Problem). Gasoline prices reflect the World Market Value of Crude Oil or the Taxes collected by the States involved. In the UK, that is a converted 7-8$ per gallon, in the US 3.00-3.90 per gallon or in Iran and others Countries a converted .50 cents to 2.00 per gallon, subsidized by government.

    Oil is almost exclusively traded in US dollars world wide before it enters other markets, so when the US dollar depreciates relative to say... the Saudi riyal, everyone everywhere on Earth pretty much feels the effect uniformly. Absent an exceptionally high tax or subsidy, the USD price of gas should be expected to be the same everywhere.


    However, if the British Pound has appreciated in value relative to the American dollar, then saying the "converted price" is $7-8 per gallon doesn't give us any clear idea how expensive the British perceive gasoline prices to be.


    Quote Originally Posted by questioner1
    It sounds to me like the entire world economy is one big counterfeit.
    Where's the logic that someone can just make his loan worth less, whenever he wants?
    It's all a combination of trust, and people only looking at their own small piece of the picture.

    Quote Originally Posted by jackson33
    And, sinister as it sounds, this is exactly what makes the US Federal Deficit sustainable. Asian countries like Japan keep hoarding US dollars and refusing to spend them in our markets. Instead they loan the money back to us to finance stuff.
    Not exactly correct, kojax; Japanese debt, is financed primarily by the Japanese themslves, where the American Debt is primarily financed by other Countries. Then the Japanese people, have invested more than any other Country, with in the US, Toyota one of the largest.
    What I mean to say is that, rather than buy tangible goods from the US markets, Japan prefers to loan us money. Americans spend US dollars to buy cars from a company like Toyota. Toyota then converts those American dollars into Yen to pay their executives back in Japan. (A lot of their cars are actually built in the USA by American workers, so some of the dollars don't need to be converted.)

    In the process of converting US dollars into Yen, someone who has a lot of Yen is trading those Yen away to get Dollars. What does this guy do with those dollars? He can't spend them to buy stuff in Japan, because Japanese shop keepers don't want US dollars. So, does he go out and buy American made goods with them? (This would seem the most practical use for an American dollar.) No. He loans those dollars to some foolish Americans, so he can go on collecting interest. (And he'll probably convert the interest into Yen as well, so he can spend it in Japan.)


    Do you see how this is little better than a pyramid scheme? In a classic pyramid scheme, you sell some product, like say Shampoo, to someone else who intends to sell it for a commission to someone else who intends to sell it to someone else for a commission to someone else, who sells to someone else for a commission........ and at the bottom of the pyramid someone is paying all those commissions in order to get a bottle of shampoo.

    Japanese industrialists keep selling US dollars to Japanese investors in exchange for Yen, who then invest the dollars to make more dollars, so they can trade them to other Japanese investors in exchange for Yen, who will then invest those dollars to make more dollars to trade for Yen........ but ultimately at the end of the day somebody somewhere is trading an awful lot of Yen to get some US dollars they can't actually spend in their own country.

    When the trade deficit gets bad enough, some Japanese investor somewhere is going to find them self holding a lot of currency that's little more valuable than Monopoly money to a Japanese person.
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    Oil is almost exclusively traded in US dollars world wide before it enters other markets, so when the US dollar depreciates relative to say... the Saudi riyal, everyone everywhere on Earth pretty much feels the effect uniformly. Absent an exceptionally high tax or subsidy, the USD price of gas should be expected to be the same everywhere.

    However, if the British Pound has appreciated in value relative to the American dollar, then saying the "converted price" is $7-8 per gallon doesn't give us any clear idea how expensive the British perceive gasoline prices to be.
    kojax, not exactly; Regardless what currency is used to base a value, the final result to a currency is on it's value. That is if oil were traded in Euro's, the price for crude would have the same value as if it were traded in US$...

    This morning (5/17/2010 8AM ET), a story in itself;

    Commodity traded crude barrel; 70.55US$, 56.98 Euro and 48.72 Pd. converted.

    Refined Crude to Lead Free Gasoline/Petrol gallon; 2.12 US$, 1.71 Euro and 1.46 Pd. converted.

    Using the Gallon, these are the prices charged at the distribution point, on average and without regards to the various requirements placed on the refinery for individual State/Country demands, the basic price. Keep in mind, that currencies themselves are also traded, much as oil, but not necessarily setting the value of in State prices for goods or services, only those from out of State.

    1 Gallon = 3.79 Liters, but for this purpose, lets talk in Gallons.

    These prices are the product price in any Nation, converted to whatever that current currency value may be. Then in the UK, that gallon which cost American Retailers 2.12, cost the UK retailers the equivalent of 2.12US$ (1.46Pd). The reason the end price for that 2.12US$ being inflated to 7 or 8.00 is simply taxes, operating cost differences and whatever quality differences that may exist.

    When the trade deficit gets bad enough, some Japanese investor somewhere is going to find them self holding a lot of currency that's little more valuable than Monopoly money to a Japanese person.
    I'm not sure where your going here, but I'll explain something the way Glenn Beck did, last week on his daily Fox show.

    In your daily activity (no less than any National/Business activity) you trade with dozens of people (as US/Business does with all Nations) which amount to a very large deficit in your funds available. You may spend 100.00 on Groceries, but your grocer BUYS nothing directly from you, travel someplace and all the way spending money with people that you will never see again, much less that will buy something from you. You in turn, work for wages (trade off) and collect a wage. All this and what called the "Economy" is what it's all about.

    The US does have a trade deficit, which is out of line for certain needs that do not exist, but this has nothing to do Japan or more relevant China and OPEC Nations, whom we literally finance to an extreme degree. We ARE lucky they do invest directly or indirectly in the US, but they do so to finance our extravagances, all of which feeds the Worlds Economy, including their own.
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    [quote="jackson33"]
    I'm not sure where your going here, but I'll explain something the way Glenn Beck did, last week on his daily Fox show.
    Was this ironic? Did Glenn Beck really explain it like that?
    What i mean is, are you really using Glenn Beck's explanation, or are you joking?
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    Quote Originally Posted by jackson33
    I'm not sure where your going here, but I'll explain something the way Glenn Beck did, last week on his daily Fox show.
    I'm sorry if I'm mistaken (I'm not from the USA) but isn't Glenn Beck the famous mentally ill TV commentator?
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    Interesting; two for the price of one....

    If you wish to argue the principle, I mentioned giving credit to another person (could have pretended it was my thoughts) but happen to agree with, please advise.

    Yes q, basically he said it that way, from my rather aged memory and no Twit, Beck is not known by all as anything but a thorn in the side of the current US Administration. He has done things politically speaking, for a common person and self proclaimed former drunk, that very few have been able to accomplish in such a short time.
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    I'm sorry if I'm mistaken (I'm not from the USA) but isn't Glenn Beck the famous mentally ill TV commentator?
    Yes he is
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    Quote Originally Posted by Twit of wit
    I'm sorry if I'm mistaken (I'm not from the USA) but isn't Glenn Beck the famous mentally ill TV commentator?
    Yes, and his ratings are through the roof. He's not necessarily mentally ill, but he's definitely crazy.
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  32. #31  
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    Quote Originally Posted by jackson33
    Oil is almost exclusively traded in US dollars world wide before it enters other markets, so when the US dollar depreciates relative to say... the Saudi riyal, everyone everywhere on Earth pretty much feels the effect uniformly. Absent an exceptionally high tax or subsidy, the USD price of gas should be expected to be the same everywhere.

    However, if the British Pound has appreciated in value relative to the American dollar, then saying the "converted price" is $7-8 per gallon doesn't give us any clear idea how expensive the British perceive gasoline prices to be.
    kojax, not exactly; Regardless what currency is used to base a value, the final result to a currency is on it's value. That is if oil were traded in Euro's, the price for crude would have the same value as if it were traded in US$...

    This morning (5/17/2010 8AM ET), a story in itself;

    Commodity traded crude barrel; 70.55US$, 56.98 Euro and 48.72 Pd. converted.

    Refined Crude to Lead Free Gasoline/Petrol gallon; 2.12 US$, 1.71 Euro and 1.46 Pd. converted.

    Using the Gallon, these are the prices charged at the distribution point, on average and without regards to the various requirements placed on the refinery for individual State/Country demands, the basic price. Keep in mind, that currencies themselves are also traded, much as oil, but not necessarily setting the value of in State prices for goods or services, only those from out of State.

    1 Gallon = 3.79 Liters, but for this purpose, lets talk in Gallons.

    These prices are the product price in any Nation, converted to whatever that current currency value may be. Then in the UK, that gallon which cost American Retailers 2.12, cost the UK retailers the equivalent of 2.12US$ (1.46Pd). The reason the end price for that 2.12US$ being inflated to 7 or 8.00 is simply taxes, operating cost differences and whatever quality differences that may exist.
    I think you're missing the point of how currency exchange works. Suppose that 1 pound were equal to two US dollars. That doesn't necessarily mean that a British pound has twice as much "buying power" inside the British economy as a US dollar has inside the US economy.

    Currency values are determined the same way as stock values are determined. It's simply the number of people buying vs. the number of people selling, and how much those people are willing to pay. It's like a big massive auction, where people with dollars auction off their dollars to the highest bidder in other currencies, be it British Pounds, Japanese Yen, or Russian Rubles.

    There is no guarantee that the value of a commodity, measured in US dollars, means the same to a consumer in another country as it would mean to an American living in the USA. If the exchange rate between dollars and pounds is poor, then a converted value of 7-8 USD for a gallon of gas might not be a lot of money to a British consumer.



    When the trade deficit gets bad enough, some Japanese investor somewhere is going to find them self holding a lot of currency that's little more valuable than Monopoly money to a Japanese person.
    I'm not sure where your going here, but I'll explain something the way Glenn Beck did, last week on his daily Fox show.

    In your daily activity (no less than any National/Business activity) you trade with dozens of people (as US/Business does with all Nations) which amount to a very large deficit in your funds available. You may spend 100.00 on Groceries, but your grocer BUYS nothing directly from you, travel someplace and all the way spending money with people that you will never see again, much less that will buy something from you. You in turn, work for wages (trade off) and collect a wage. All this and what called the "Economy" is what it's all about.

    The US does have a trade deficit, which is out of line for certain needs that do not exist, but this has nothing to do Japan or more relevant China and OPEC Nations, whom we literally finance to an extreme degree. We ARE lucky they do invest directly or indirectly in the US, but they do so to finance our extravagances, all of which feeds the Worlds Economy, including their own.

    Now, working off of the above explanation, let me explain what I mean. The relative value of a Japanese Yen to a US Dollar is determined by how many people wanted to buy dollars today, vs. how many people wanted to buy Yen today. It does not in any sense reflect the number of accumulated dollars or yen that were owned, but not offered for trade today.


    Suppose there are 2 countries, Country X and Country Y with currencies, Currency X and Currency Y. It's quite possible that savers in Country X could be holding 10 trillion of Currency Y, while savers in Country Y are only holding 200 Billion of Currency X, but have an exchange rate of 5 Currency Y to 2 Currency X.

    This is because the number of people buying and selling on any given day is not always reflective of the total relative supply levels. (The people who are choosing to save their money rather than exchange it are invisible to the exchange rate.) The Currency Y holders think they have 4 Trillion Currency X worth of savings in their pocket, but if there's ever a "run on the banks" type situation where everyone wants to trade all at once, all they're going to get when they try to cash in is 200 Billion Currency X. (Because that's all there is to trade for.)

    Usually, if you see a situation like this, then what it means is that savers in Country X are choosing to save their Currency Y rather than trade it, but savers in Country Y are choosing to exchange their Currency X almost as fast as they get it. The disparity will keep growing until it reaches a breaking point. That's how bubbles burst.
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  33. #32  
    Time Lord
    Join Date
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    To try and simplify what I just said:

    Two countries may have a different percentage of their savers cashing in on any given day. When this is true, their ratio of accumulated savings will be different than their exchange rate (because the exchange rate is only based on how many people are cashing in.)

    Accumulated savings determines what happens in a "Black Tuesday" type situation where one or the other group of savers decides to cash in all of their currency for the other kind all at once. It's a lot like calling someone's bluff in poker. The exchange rate immediately disappears and gets replaced by the ratios of savings. I think, right now, that the Yen is one of the smartest currencies to hold onto.
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