UMOFX.Singapore
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Greece, the land of sun, sand and souvlaki once had a seriously cheap currency, the Drachma. It was a true vacation paradise at a bargain. Germany, further to the North, designed Audi's, autobahns and audio equipment. There was no better place to drive a technologically superior car while blaring Bach. The Deutsche Mark was a strong and stable currency.
The Greeks were relaxed, healthy and happy. No one died of stress. If they sold too many Drachma bonds and were unable to repay creditors the solution was simple; devalue the Drachma. Exports rose, imports fell and the financial health of Greece recovered with little disruption to daily life.
If the hapless Hellenics got themselves into trouble borrowing foreign currencies such as Deutsche marks, British Pounds or Swiss Francs, the solution was equally straightforward; default. Greece has been in default for 105 of the past 200 years and has much experience in this somewhat draconian method of financial recovery.
The Germans, on the other hand, were efficient, precise and slightly less relaxed. They worked longer hours, retired later and got less vitamin D. They took a vow of fiscal stability after their Great Depression defaults in the 1930s and, other than the cost of integrating the former East Germany, have been financially prudent.
The rules of the game changed with the introduction of the Euro. Greece can no longer devalue their way out of a debt burden and, from their perspective, the Euro is perpetually overvalued. Their only two options are austerity, or default. They've tried the former and will solve their problems – yet again – with the latter.
Germany finds that their new currency, also the Euro, is perpetually undervalued. Their exports are flying out of the factories as fast as they can produce them. It's amusing how one currency can be simultaneously cheap and expensive.
The Euro is a flawed concept because it does not allow member countries a plan "B". Plan "B" is always devaluation. It is astonishing that Europeans locked themselves into a financial partnership and neglected to build an escape route.
Asian politicians have not learned from the European example and many have called for a unified Asian currency.
Malaysia's deputy minister of finance, Lim Siang Chai, called for China to create a single Asian currency last month on the grounds that it "could help diminish the risk of exchange rate fluctuations and help boost the region's trade" according to China Daily.
In 2009, Yukio Hatoyama became prime minister of Japan (for nine months) after he called for a "single Asian currency to strengthen the region's economic and political ties."
At the 2011 Asean Summit in Jakarta, politicians, academics and economists emphasized the need for Asian countries to stabilize their regional currencies. They said a single Asian currency would sterilize the impact of the US dollar.
The most frequently cited benefits of a single Asian currency are;
Stable exchange rates
Lower cross-border transaction costs
Boost regional trade
Help integrate Asian economies
Avoid a repeat of 1997.
In the summer of 2010, Masahiro Kawai, CEO of the Asian Development Bank Institute, said that since East Asia is expected to become the world's largest economic bloc by 2020, it is natural to expect this region to have its own globally accepted international currency.
First of all, stable exchange rates are dangerous. Currencies must be able to fluctuate enough to remind those with international exposure that active risk management is essential to long-term business viability. Low volatility, as witnessed from 2002 to 2006 in the West, or from 1992 to 1997 in Asia, leads one to misallocate capital and to forego hedging. Low volatility is inevitably followed by extreme volatility, whereas a regime with moderate volatility is robust and sustainable.
Secondly, transaction costs, as a quick look at currency spreads on the OANDA platform confirms, are negligible.
Thirdly, European trade with Asia has increased by 200% over the past 10 years, and Asian intra-regional Foreign Direct Investment has jumped from 19% to 79% since 1991. Flexible exchange rates have been perfect for enhancing both international and regional trade. Why tamper with that flexibility and success?
But the main reason why a single Asian currency won't fly is demographics. Japan is close to retirement with a median age approaching 50. Singapore and South Korea are entering the mid life crisis zone at 40 and 39 years respectively. China at 35 is the classic office worker, Indonesia is young and restless at 28, India's 26 year olds are energetic and rebellious and Cambodia is just entering the workforce with a median age of 23. Almost 25 years separate the oldest and youngest nations in Asia.
European nations, despite their vast cultural differences, are all the same age. Just 5 years separates 45 year-old Germany from the youngest cohort of France, Portugal and the UK, who are all just over 40.
The inflexibility of the Euro led the overindebted countries down an inescapable path of excess debt. Without a plan "B" the only solution is debt repudiation. Euro members are the same age but have very different cultures.
Asian politicians calling for a single Asian currency must recognize that in addition to divergent cultures, the Asian generation gap is extreme. Countries of different ages grow at different rates and require currencies that move at different speeds. Asian diversity is a positive and makes the region more resilient.
Tying Asian nations together with a single currency would be singularly disastrous.
:-?
The Greeks were relaxed, healthy and happy. No one died of stress. If they sold too many Drachma bonds and were unable to repay creditors the solution was simple; devalue the Drachma. Exports rose, imports fell and the financial health of Greece recovered with little disruption to daily life.
If the hapless Hellenics got themselves into trouble borrowing foreign currencies such as Deutsche marks, British Pounds or Swiss Francs, the solution was equally straightforward; default. Greece has been in default for 105 of the past 200 years and has much experience in this somewhat draconian method of financial recovery.
The Germans, on the other hand, were efficient, precise and slightly less relaxed. They worked longer hours, retired later and got less vitamin D. They took a vow of fiscal stability after their Great Depression defaults in the 1930s and, other than the cost of integrating the former East Germany, have been financially prudent.
The rules of the game changed with the introduction of the Euro. Greece can no longer devalue their way out of a debt burden and, from their perspective, the Euro is perpetually overvalued. Their only two options are austerity, or default. They've tried the former and will solve their problems – yet again – with the latter.
Germany finds that their new currency, also the Euro, is perpetually undervalued. Their exports are flying out of the factories as fast as they can produce them. It's amusing how one currency can be simultaneously cheap and expensive.
The Euro is a flawed concept because it does not allow member countries a plan "B". Plan "B" is always devaluation. It is astonishing that Europeans locked themselves into a financial partnership and neglected to build an escape route.
Asian politicians have not learned from the European example and many have called for a unified Asian currency.
Malaysia's deputy minister of finance, Lim Siang Chai, called for China to create a single Asian currency last month on the grounds that it "could help diminish the risk of exchange rate fluctuations and help boost the region's trade" according to China Daily.
In 2009, Yukio Hatoyama became prime minister of Japan (for nine months) after he called for a "single Asian currency to strengthen the region's economic and political ties."
At the 2011 Asean Summit in Jakarta, politicians, academics and economists emphasized the need for Asian countries to stabilize their regional currencies. They said a single Asian currency would sterilize the impact of the US dollar.
The most frequently cited benefits of a single Asian currency are;
Stable exchange rates
Lower cross-border transaction costs
Boost regional trade
Help integrate Asian economies
Avoid a repeat of 1997.
In the summer of 2010, Masahiro Kawai, CEO of the Asian Development Bank Institute, said that since East Asia is expected to become the world's largest economic bloc by 2020, it is natural to expect this region to have its own globally accepted international currency.
First of all, stable exchange rates are dangerous. Currencies must be able to fluctuate enough to remind those with international exposure that active risk management is essential to long-term business viability. Low volatility, as witnessed from 2002 to 2006 in the West, or from 1992 to 1997 in Asia, leads one to misallocate capital and to forego hedging. Low volatility is inevitably followed by extreme volatility, whereas a regime with moderate volatility is robust and sustainable.
Secondly, transaction costs, as a quick look at currency spreads on the OANDA platform confirms, are negligible.
Thirdly, European trade with Asia has increased by 200% over the past 10 years, and Asian intra-regional Foreign Direct Investment has jumped from 19% to 79% since 1991. Flexible exchange rates have been perfect for enhancing both international and regional trade. Why tamper with that flexibility and success?
But the main reason why a single Asian currency won't fly is demographics. Japan is close to retirement with a median age approaching 50. Singapore and South Korea are entering the mid life crisis zone at 40 and 39 years respectively. China at 35 is the classic office worker, Indonesia is young and restless at 28, India's 26 year olds are energetic and rebellious and Cambodia is just entering the workforce with a median age of 23. Almost 25 years separate the oldest and youngest nations in Asia.
European nations, despite their vast cultural differences, are all the same age. Just 5 years separates 45 year-old Germany from the youngest cohort of France, Portugal and the UK, who are all just over 40.
The inflexibility of the Euro led the overindebted countries down an inescapable path of excess debt. Without a plan "B" the only solution is debt repudiation. Euro members are the same age but have very different cultures.
Asian politicians calling for a single Asian currency must recognize that in addition to divergent cultures, the Asian generation gap is extreme. Countries of different ages grow at different rates and require currencies that move at different speeds. Asian diversity is a positive and makes the region more resilient.
Tying Asian nations together with a single currency would be singularly disastrous.
:-?
