Different names, different sizes and different denominations, but the word 'money' denotes purchasing power. Sure, the value of a denomination may keep fluctuating over a period of time due to variety of causes - inflation, deflation, adjustments, corrections, and more importantly, the importing needs and the exporting capacity - but the bartering tradition of money (money for goods and vice versa) has pretty remained the same all over ever since its introduction into the economic domain. As long as context remains local, the value of money doesn't mean much. A Rs 10 back in 1900s is still a Rs 10 note, in the current age, though the purchasing power of it has changed vastly. The terms 'value' and 'purchasing power' appear synonymous at face value, and to certain extent, they are. But context is what that differentiates their true meanings. Applied locally (to transactions confined to the borders of the state), the term value is used interchangeably with the 'purchasing power' of the money and what determines the strength of it, is among other factors, inflation, chiefly. In broad terms, inflation is a situation of more money chasing fewer goods. Demand for the goods remaining the same, inflation has a twisted way of creating artificial scarcity. While elemental economics states that the demand and supply are what that drive prices, there is also that hidden component, money, whose widespread availability or the scarcity, can have a direct impact on the prices of the goods, demand and supply remaining constant. But why would there be more money in the market all of a sudden, hunting for its suitor? On the brighter side of the argument, more money is a result of a healthy economy, with more people being employed with better salaries going after commodities that are being produced at a healthy rate by the manufacturing sector. Though more of anything is a bad thing, inflation in moderation is a desirable side-effect of a burgoening economy. But what about the flip side to this scenario? One look around the stagnantion in the current climate, particularly in the Western hemisphere, inflation brought out by enormous public spending to jump start the sluggish financial proceedings, is the last thing one needs in these economies that have already been brought to their knees, by their indiscretionary spending ways, in both the public and private realms. But what has inflation got to do with the value of the money?
At this level where global fates and economies are intertwined more than ever before, the value of one's money is not upto one's policies alone, but heavily dependent on the mercy of others' whims, like a limp puppet dancing to the tunes of an unseen master. While the concept of money is pretty straightforward at the regional level, the picture gets murky when the stage shifts international, where it is traded just like any other commodity, and is subjected to the associated protectionist agendas and miscreant malpractices, all under a new moniker 'currency'. Consider the scenario right after a country has taken its first breath in the league of sovereign nations and introduced its currency to the international markets for the very first time. Now, is the decision to size up its currency against other established currencies purely arbitary, a parity value that is pulled out of a magician's hat? Well, it cannot be. Though the rate at which a currency fares against others is still determined by a federal bank, which governs its monetary policy, it has to be based upon the country's financial soundness, measured in terms of GDP, growth rate, foreign exchange and gold reserves and the like. Take the very recent example of the introduction of the Euro, which when flagged off, traded almost on par with the American dollar (a Euro for a dollar), and the rest of the international markets accepted it as a fair trade, taken into consideration the inherent financial strength of the Euro-bloc. It doesn't really matter what the value of the currency is at the beginning of the race, as it never is a sprint to the finish lane, but an unending marathon of ups and downs. Eventually every currency will settle down commensurate to its trading potential, which is a direct reflection of the country's growth and developmental outlook. But setting the value of currency is not so black and white, particularly when there are politics involved, and as is evident in the latest currency wars waged against the Chinese Yuan by the Western powers, what you see is not what you get, more so when money is involved.
A big factor that plays into the potential value of any currency is the country's Export Import (ExIm, in short) policy, playing to its strength either on its export driven measures, like China's, or on its import dependent practices, like US's. If it is the former, it wishes its currency be traded cheaper, as there would be more demand for its products in the international arena on account of its cheaper prices. If it is the latter, the currency would rather be strong, as it would fetch more goods for its money. Obviously, a currency cannot be both strong and weak at the same time to help both its exports and imports. It has to pick a side, determine whether its benefit lies in keeping its currency strong and help its importers or pare it down and help its exporters. Conventional wisdom states that a currency that is traditionally weak gives rise to inflation, as there is more money in circulation in the domestic market, driving the prices up. So usually when the economic indicators point that the inflation is on the rise, the federal bank uses its standard weapon of choice, the interest rate, the raising of which pulls the extra money out of market into the banks, creating an artificial scarcity for the currency to combat the rampant availability. And it is a sign of a good heart beat that this see-saw, of raising and lowering interest rates, happens every once in a while, assuring both the domestic and the international investors that the currency is viable and the economy vibrant. And truth be told, India is doing a good job of maintaining a healthy profile, visa vis its currency, letting the market forces rule on its value, than artificially forcing it one way or the other, which is exactly what is being accused of its neighboring nation, China.
A strange equation has emerged in last decade or so between US and China, where the seemingly have-nots (China) started dictating terms to the purported haves (US). An economy almost entirely built upon cheap manufacturing costs, China has risen to the level of becoming a global lender, propping up the economies of its customers, by snapping up their currencies. To start, trade between two nations is never an even one, exchanging goods in exactly the same values. While US consumes more of China's cheaper products (practically every small to medium household item), it doesn't export much of its high end items (cars, planes, heavy equipment and other hi-tech wares) to China , creating a lopsided balance in payments called trade deficit. As an example, say US imports a billion dollars more (though the actual figure is much much more) than it exports to China every single year, and before the turn of the decade, rings up a tab of ten billion dollars. Now, how does US propose to clear its bill? Surely, it cannot just print extra paper money, all ten billion dollars of it, and simply hand it over to China and call it even, as that measure would devalue the dollar to irreparable levels and destroy the creditworthiness of the country for a long long time. Clearly, this is an undesirable situation to not just the borrower, but the lender as well. There are only 2 options avaialable with US, neither of which are pleasant - 1. Build value in its currency over a period of time, by a combination of short term spending cuts (of money-sucking social programs and top-heavy bureaucracy) and long term modest fiscal policy 2. default on its payments in the hope of settling with its creditors and restructuring its debt. The first option, untenable, as long as there are elections, and the second, unimaginable, more to the creditor than to the borrower. China cannot have US cut down on its consumption, lest its own manufacturing sector collapse, for want of demand. So what it does completely belies the basic rules of lending, and that is, encourage the near-bankrupt borrower spend even more, by extending a greater line of credit. But what has all this lending and spending got to do with currency? On paper, what China is doing right now is bankrolling US's credit, should have happy faces on both sides of the lending equation. But why, of all countries, US is crying foul on this deal accusing China of rigging the game? And this is where currency comes back into play.
Ideally, what would happen with happening economies is, global players would rush and try to be a part of the success story so as to quickly multiply their investments. And the influx of all that foreign direct and institutional investments would automatically strengthen the country's economy, which in turn would appreciate the value of its currency, thereby making its imports cheaper and exports costlier. But an export dependent economy like China couldn't let that happen. So how does it keep its currency down, despite its stellar economic scene littered with strong global and domestic players? A three-pronged approach is how - 1. using its forex reserves' deep pockets built up over enormous trade deficits with its trading partners, to buy up the bonds and bills of its borrowers, thereby footing the bill of their exports and keeping the borrower's currency artificially inflated. 2. print more money domestically and stir up some artificial inflation floating more of its money in its own markets 3. shut down the door on its imports, or at least, make it extremely hard for other nations to export goods to China by imposing extraordinary tariffs and putting up other restrictive obstacles in the way. And more, when Western economies are trying to claw their way out of the recession by manufacturing more at home and export them to healthy states, this kind of currency manipulation ensuring that there be only one supplier in the global market, has the rest of the world up in arms. It is a dangerous game that China is engaging in, hoping for the dark clouds of recession to quickly blow over and the stagnant economies recover quickly back to their voracious consuming ways, all this before China runs out of the long credit rope that it currently is extending to its partners. And when that happens, economists have to invent a new word to describe the economic black hole that would be created, when China can no longer lend and its debtors can no longer consume, essentially collapsing every economy that matters. And getting out of such deep economic craters would require a complete change in trading and counting practices, not little relief measures and stimulus schemes. To think that all this would happen without firing a single shot or without countries waging wars (which was how it was envisioned by the doomsayers) is plain mind boggling. And at the nucleus of it all, is the currency, delicately balanced by the positive and the negative forces.
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