Greece and the Euro: Is the Worst Yet to Come?

With the recent development in Greece’s debt crisis (a real shocker), the Euro has gone for quite a tumble this past week.  Investors have started to question whether or not the broken country will be remaining a part of the European Union.  This in turn has put the currency into a free fall that only began to even out in the past day.

Reuters reported Monday that Greece’s bond rating has been dropped from a BB- to B on the Standard and Poor’s bond ratings.  This is considered by most investors as a junk bond.  At this time, investors in the Euro realized this is a time to sell to a more stable currency.  The Euro dropped over .05 to the US dollar in a matter of two days of trading.  While it has not been completely detrimental in terms of the value it has been seeing over the past few months, the concern remains what the EU will do with Greece’s economic struggle.

What began to happen after hearing the possibilities of a haircut for investors in Greek bonds, investors starting looking to commodities to salvage potential loses by the hurt bond.  While experts are stating there is no immediate worry for any countries in the EU to default, investor confidence is far bigger concern for the Greece, EU countries, and the Euro itself.  

As for my own investments in the foreign exchange market, holding the Euro with the GBP and USD was completely destructive.  The lack of diversification that I inexplicably held has hurt the amount of equity I hold, and in the future, I plan to invest more wisely.  Blunders in the currency market were bound to happen when having only traded for a single month, and I hope that my failures will eventually lead to understanding and future success.

What I am most curious is what Greece is going to do with their current and continuing economic struggles.  The Euro doesn't seem to be benefiting them at all (except for bailing them out), and the inability to devalue their currency as the European Central Bank controls the Euro makes it near impossible for Greece to fix their own problems.

What do you think will happen to the Euro in the near future?  With all the troubles Greece has experienced over the past year, is it truly worth it for them to remain in the EU?

References: "Timeline: Greece's debt crisis". Reuters. 9 May 2011.
                    "FOREX-Euro off 3-week lows on commodities, debt concerns a drag"
                    Reuters. 9 May 2011.

(Post by Evan Amano)

Not the Global Currency, But the National Currency

Here is a nice piece of writing by Daisuke Ito, a member of the Global Economics Team, about the potentials of a universal currency:

Every country has developed a currency of their own. Nowadays, as transportation systems and internet technologies continue to improve, the global economy is growing closer together. A company can transfer goods and services to anywhere in the world. This situation leads to new types of financial risks. Some researchers say that abolishing national currencies and setting a global currency will result in a good effect on the world economy. Although a global currency could get rid of currency exchange risks, it would lead to three negative impacts on the global market: degenerating economy, losing identities, and difficulties in management. 

Supporters of the global currency claim that the currency can end the risks associated with currency exchange rates. Actually, a global currency may make world business pick up in the short run. However, establishing a global currency will result in economic degeneration. A currency is valued by people. If people trust a government, they regard $100 as $100. However, if a country faces a scandal or a crisis, investors will transfer money from that currency to another currency in order to keep their asset values. Moreover, when a global currency is settled and the value of the currency drops, investors will buy real assets such as gold or silver instead of holding the currency. In this situation, it is difficult to value gold or silver when there is only a single currency to base off of. Therefore, introducing a global currency will result in an inconvenient way of economic trade, and world business will degenerate. 

Supporters of the global currency also argue that currencies’ roles are not a representative of national identity but a tool of economic trades. The national currencies represent national identities; most of the world currencies are printed with historic important persons, national heritages, national parks, and architectures. These things make a currency part of national identity. In addition, there are many memorial coins or currencies in the world. In fact, the United States publishes and creates varieties of coins and currencies. These coins and currencies have two roles: celebrating personal accomplishment, and forming the national identity. Furthermore, if a global currency replaces national currencies, central bank will lose their identities. A central bank has an essential role of keeping the national safe. The bank has to maintain a balanced national economy by adjusting the interest rate and adjusting the quantity of the currency. 

The final argument advanced by supporter of a global currency supporter is that a global currency leads to the difficulty of management. When a world organization sets a global currency like Euro, it is hard to set money exchange rates from the national currencies to the global currency. Now, the world currencies exchange rates change day by day. It means that we cannot decide which currency has a higher value or which currency has a lower value. However, the organization has to establish the world exchange rates in order to set a global currency. In addition, the global currency organization, which will maintain the global currency by using adjustment of the interest rates and adjustment of the quantities of a global currency policy, will face difficulty in managing the world economy. When the organization makes a decision to lower central bank interested rates because of recession in one country, the country’s economic situation will get better. However, another country where business is brisk will suffer from inflation. 

Moreover, the organization committees should be constituted by people from all over the world in order to avoid a country possessing monopolized power. No matter how this situation is achieved, the organization will face hardship to unify the opinions because philosophies and situations vary from country to country. For instance, the United State is a right wing country, but Germany is a left wing. These two countries have far different opinions about economic policies. The German government takes care of people very well while the United States principles are based on self-responsibility. 

A global currency seems to be one solution to the world currency problem. However, the system has both negative and positive impacts on a country, and either impact appears depending on their economic situations. Moreover, the governing organization will face a decision making dilemma and a hardship of achieving an international consensus. Overall, setting a global currency is nothing but a negative spiral. 

Written by Daisuke Ito

UK Manufacturing Slowing Down

Financial Times reports that the UK economy that has shown signs of growth is finally slowing down.  The managers’ index for manufacturing purchase power has decreased to its lowest point, on the index at 54.6, in the past seven months.  Previous reports had been posted at 56.7 in March and 61.7 in January of this year.  

The weak growth is becoming a concern for the UK, as it seems consumer trends have started to revert to a lower consumer demand.  While the exports of products has actually increased over the past few months due to the weakening of the pound, the domestic market has seen little growth over this seven month period.

With the pound growing weaker over the past few months, this should be something to watch and see how the UK will improve their domestic economy.  The exports for the country won’t be able to compete and keep a viable source of revenue in the future, and the best chance is for the pound to become stronger to improve domestic purchasing power.

Should the UK be concerned with the slower economic growth?  Would a stronger or weaker GBP help the UK economy more?

References: “UK Manufacturing Slows to Seven-Month Low”. Financial Times

(Post by Evan Amano)                                                                                             

Yap: Home of the Oddest Money on Earth

During my review session for Economies of the Pacific Northwest (Economics 432), my professor Ed Whitelaw brought up the topic of the currency located on the Island of Yap.  Having little knowledge of the island, we continued to discuss the currency used on the island.  Immediately I knew this was something that could correlate with GET.  However the differences between the foreign exchange market and the currency on the island of Yap differ astronomically. 

Located amongst the Caroline Islands, Yap is a part of the Federation of Micronesia.  With less than ten thousand people, the small island has a big way of dealing with their money.  The Rai Stones (while not commonly used today) are huge slabs of limestone that were imported from Palau, located 450Km away, by the Yapese over the past hundreds of years.  The round, donut shaped limestone varied in size, ranging from 1.4 inches to 12 feet in diameter.  The value of the Rai Stones is valued by the size and history behind the stone itself. 

While the US dollar is the standard currency in Yap today, Rai Stones are used for ceremonial events, ones that might bond families together or possibly agreeing to any contractual ties on the island.  Furthermore, Rai Stones are no longer brought to Yap, creating a constant supply in the currency.  Due to the size and nature of the Rai Stone, the citizens know which stones belong to different members of the community, and sometimes do not even bother moving them from their previous location after contractual agreements have been made. 

It seems beyond strange why a society would consider shipping in such large pieces of rock to represent money, but perhaps the perceived importance of how the Rai Stones got to Yap and the agreements settled over them is what made the stone keep value. 

What do you think of the Rai Stone?  Do you believe that the United States, or any major country, have a similar valued commodity?

(Post by Evan Amano)

Currency Watch: April Report

It has been three weeks since trading started for the Global Economics Team, and here are some of the results to the first run through using a FXCM demo trading account.

Through 9 trades from April 14-April 26, I managed to gain $96.65 in equity.  The amount is miniscule compared the total volume of currency that I had traded (350,000) and the amount of equity I possess ($50,096.65), showing truly how low of a margin the foreign exchange market works on. 

The main focus of my trades during April surrounded the USD, which is typically considered a safer currency to trade in the foreign exchange market.  Most of my trades came from buying the EUR, AUD, and GBP. 

Over this next week, I plan to update more regularly on what may have caused the rise in value of the currencies, while also beginning to expand where I invest my mock money.  Also, I plan to invest higher amounts of my equity into well researched currencies, while diversifying my equity to avoid unsystematic risk.

Expect more frequent updates in the near future!

(Post by Evan Amano)