December 30, 2011

  • Why devaluation hurts the middle class more...

    Currency devaluation has been used by many nations to deal with trade deficits and sovereign debt.  If the denomination of debt is in currency x, if currency x is devalued, then it can pay back x in inflated terms, thus reducing its effective debt.

    However, this disproportionately hurts the middle class - and in the middle class, I'm basically including all wage-earners - wage, not people who make their money in trading equities, or own large companies. 

    Helps:
    People in massive debt.  Their debt is now worth less.  They are less in the red.  These people spent too much/borrowed too much, and the devaluation helps.

    Neutral to negative:

    Business owners.  There is a negative effect, but inflation forces them to raise prices, changing the transactional amounts, so their business re-scales to the new inflated/devalued currency.

    Neutral to positive:

    mutlinational businesses

    Locally, they can slowly raise wages to new inflated terms (lowering costs temporarily).  Internationally, they become more competitive with better margins temporarily, bringing in revenues in non-devalued currency.

    Local cash reserves are devalued, but this may be offset in the medium to long term by continuing to do business, and recalibrating sale prices accordingly.

    Neutral

    Equity owners, non-ceo

    People who trade stocks end up with greater liquidity in the markets eventually - devalued currency means, eventually higher stock prices - as the equities re-calibrate to reflect inflated currency.

    Hurts:

    Wage earners with savings.  Savings are devalued, wages are devalued.  Wages will slowly go to new norms.

    Hurts most:

    Retirees or people at the end of their working lives.  Savings devalued, no more time to earn more wages - will not experience wage recalibration.