Recent Azerbaijan Devaluation Delivers Important Lessons

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By Jacob Maslow

devaluationThe interesting thing about currency devaluation is that there seems to be a polite and a rude way to do it. The polite way, of course, is to devaluate your currency but put it in a nice package on it and tie a pretty little ribbon on topic of it. I am, of course, talking about the fiscal stimulus schemes engaged in by central banks ranging from the Bank of Japan, to the European central bank, and the U.S. Federal Reserve.

You might be thinking, “Well, the actual schemes these central banks engage in are not bald-faced devaluation schemes.” You might be drinking the Kool-Aid and actually believe that these stimulus schemes are simply intended to pump so much money into financial markets. This is so that some of this money ends up in real economic activity which improves people’s lives on Main Street. I am sorry to burst your bubble, but these stimulus schemes are all about devaluation. All these central banks may hem and haw about devaluation criticism, but the net practical economic effect of what they are doing is precisely that. They are devaluing their currency.

There is a lot at stake here. When the Bank of Japan destroys the value of the yen, Japanese exports become more attractive. You get cheaper products at a certain quality level, and chances are you would probably buy more Japanese goods. The same applies to European products. Moreover, your existing debt, as long as they are denominated in your currency, gets cheaper.

However, there is a lot of hypocrisy in the way central banks do their devaluations. If you devalue your currency like Azerbaijan and do it transparently, market observers would penalize your equities. They would also urge caution regarding doing business with you. I really see this double standard as hypocritical. Why can’t Azerbaijan or, possibly in the future, Greece engage in something that bigger economies engage in all the time? Whether you are decreasing interest rates or you are engaging in quantitative easing or some other elaborate stimulus program, it all boils down to one thing: devaluation.

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