In a world where currencies are not pegged to gold or other currencies price stability is achieved when major trading partners all target the same inflation rates. Otherwise wild fluctuations in rear asset prices and exchange rates will likely occur.
We should expect the following loops to occur.
Loop #1 – When central bank pursues expansionary monetary policy
- Central bank pursues an expansionary monetary policy
- investors expect inflation rates to go up
- investors expect currency value to drop in overseas market
- investors sell off real assets within country and exit funds out of country to other countries
- due to decreased demand, stocks, real estates and commodity drops in value.
- Exports become more competitive and balance of trade surplus results.
Loop #2 – When central bank pursues deflationary monetary policy
- Central bank pursues deflationary monetary policy
- investors expect inflation rates to go down
- investors expects currency values to increase in overseas market
- investors move funds into country to buy up real assets
- Due to increased demand, stocks, real estate and commodities within the country appreciates in value
- Exports become less competitive overseas and trade deficit results
US has been experiencing a balance of trade deficit since 1980. This is partially due to the result of going off the gold standard.
While it did not actively pursued a deflationary monetary policy, it’s stable politic system and high level of technology innovation, relative to other countries, has an overall deflationary effect on its economy.
The net effect is the same as if the central bank pursues a deflationary policy.
- The Asian financial crisis, Shalendra Sharma
- The savings and loans crisis, James Barth, Susanne Trimbath and Glenn Yago
- When genius failed, The rise and fall of long term capital management, Roger Lowenstein
- The bank credit analysis handbook, Jonathan Golin and Philippe Delhaise
- Barbarians at the gate, Bryan Burrough and John Helyar
- Big Debt Crisis, Ray Dalio