One of the most important aspects of a country or region is the financial sector , its main function is to facilitate the exchange that occurs between currencies and is also responsible for regulating and mobilizing them , using banks as the medium. principal. It is important to mention that the main factor of the financial system is the currency and that it can be exposed to certain situations that can affect it considerably, this is the case of devaluation .
The devaluation is a situation that occurs when given the decrease or loss of the nominal value that has a currency against other currencies overseas which can be caused by a number of different factors .
- What is devaluation?
- Types of devaluation
- Examples of devaluation
What is devaluation?
The devaluation of the currency basically consists of the loss of the value that it has against other foreign currencies , it is the reduction of the gold parity that the currency has. This devaluation process brings with it a series of important consequences that can affect the financial system of a place. It also consists of setting a much higher price for gold in terms of the currency that belongs to the country that makes the devaluation.
Among the main characteristics that can be found in the devaluation of the currency are the following:
- It is a type of financial procedure .
- It can only be presented in one country or in a group of countries which are subject to the gold standard.
- It can be done gradually or daily through a system of mini readjustments.
- When it is presented, the affected currency becomes cheaper in the international market .
- It is the representation of a bad indicator in economic terms.
- It is a reflection of the loss of economic power in a country before its international competitors.
- They become official after the central bank of a given country makes it official .
Types of devaluation
There are several types of monetary devaluation that can occur in financial systems, these are the following:
- Competitive devaluation : occurs when two countries enter to compete in a real currency war to achieve placing one of them above the other with the aim of improving trade .
- Internal devaluation : in this case, an attempt is made to increase competition through devaluation as a strategy to be able to make a series of adjustments in income, wages and to reduce the deficit.
- Tax devaluation: in this type of devaluation there is a reduction in the taxes that have been established by the State with the main objective of being able to promote exports and reduce the prices of local products .
There are actually several causes that can lead to a devaluation in the currency of a country. First, it can be caused by an extreme lack of confidence in the economy or its stability . The wars , the terrorism and the debt of governments are causing the currency to depreciate because the investors , both domestic and international, trying to take their money from the country .
It can also be caused by the presence of an important deficit in the trade balance , then, when the amount of products that are imported turns out to be much greater than that of the products that are exported, a deficit is produced and with this, it becomes It is necessary to have to buy larger amounts of foreign currency to be able to face the deficit.
In order to reduce and halt the imports to give greater protection to the local economy, central banks can reach Monea to devalue the products that come from the overseas then have a higher cost ; This seeks to benefit domestic production as the inhabitants will consume larger amounts of national product and will put exports aside.
There are many consequences that can arise when the devaluation of the currency occurs in a certain place, among them the following are mentioned:
- It generates higher inflation and an increase in rates because the currency decreases its purchasing power considerably and because prices and different transactions are left behind with respect to the actual values.
- There is a negative effect on people’s wages and savings and this causes the town to become poorer.
- The debts that are paid using the exchange rate devaluated currency, lose their value and wealth achieved then go to creditors .
- It can also cause the country to have a higher level of competitiveness in terms of exports because when the currency decreases, products become cheaper to purchase, especially those that come from abroad and this encourages foreign countries to want to purchase domestic products .
- Being the cheapest currency, tourism can be encouraged because the country becomes a more striking attraction due to low cost.
- When the currency is devalued it can also cause national products to be bought in greater quantity and more frequently.
Examples of devaluation
Some examples of monetary devaluation that have been suffered in the world are discussed below.
- Devaluation of the Argentine peso in 2020: the Argentine peso is the currency that has been devalued the most. In 2020 , this was devalued by 8%, mainly caused by the Covid-19 pandemic. The increase in the dollar had a considerable influence on this devaluation as well as the lack of investments and the tensions generated due to the renegotiation of the debt . An example can be seen in the last ticket that the country issued in 2017 which had a value of $ 1000, today this ticket only has a value of $ 8.44.
- Devaluation of the Mexican peso in 1994 : this year, the country experienced a major economic crisis that originated due to the lack of international reserves , which caused the Mexican peso to devalue. The consequences of this devaluation were known as the ” tequila effect ” and ” December error .” Its main causes were the imbalances that were unsustainable , fiscal and commercial deficits and a series of bonds that were bought and sold in Mexican pesos but that had to be paid in dollars.
- Devaluation of the dollar in 1971 : in the month of May of 1971 , the United States came first in the nineteenth century in a deficit in its financial system . Faced with this situation, the Bretton Woods Accords were abandoned and the dollar became a fiat currency. This situation was mainly caused by the aforementioned agreement and by the Vietnam War that now affects the country in the economic and military sphere.
It was President Nixon who, on August 15 of that same year, ordered the closing of the gold-dollar exchange window and thus ended the problem by significantly changing the country’s economic history . From that moment, a series of measures were established to avoid economic crises and new taxes were established to sustain the country’s economy and imports.