Currency Devaluation Looks Likely

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It seems that the Korean government has set its eyes on currency devaluation as a way of addressing economic problems. With South Korea facing several difficulties across multiple industries, currency devaluation or a `supplementary budget’ as it is being called is perhaps not the smartest move to try and make.

The Park Geun Hye administration which has been mired in scandal, seems to be trotting out the same tired playbook to deal with the economy. That solution is to simply print more currency which ensures a short term beer buzz in the economy, followed by long term currency devaluation and pain.

The reason being for this repetitive tactic of currency devaluation is that: It worked before so why not this time?

The Supplementary Budget

Private English StudentsSince 2014 the PGH government has basically been using currency devaluation as a tool to try and solve the country’s problems. The thinking is quite simple, and unfortunately simpleminded. A response to slowing exports and lower demand would appear to be just to make more currency.

But this is like a drug addict taking drugs, the more the addict takes / government prints the less effect it will have. And as the addiction to cheap currency takes hold, the more will be needed in order to get the same economic high.

As PGH & Co. have printed more and more, the cheaper the currency becomes compared to other currencies and the cost of goods naturally increases to reflect this increase in currency.

By what has become termed a `habtual supplementary budget’ the PGH administration has essentially used any minor blip on the economic scene as an excuse to light up the printing presses. This temporarily eases pain, but ensures currency devaluation becomes a very real and present threat.

In 2014 it was the Sewol accident, in 2015 it was MERS (Middle Eastern Respiratory Syndrome) and this year it was the ship building crisis. I am not saying these were not bad events or harmful to the economy, but when the bail-out precedent for companies is set, the government is expected then to come to the aid of every industry that gets ht by some kind of problem.

But here at the end of 2016, it is already being planned that a supplementary budget will be needed to deal with the expected economic woes that will visit the peninsula next year.

This is before we even know what those woes are! So if the government prints this extra currency at the beginning of the year and then something bigger happens such as a large earthquake in Gyeongju… there’s nothing left to do!

Currency Devaluation & the Expat

Every nation on the planet is playing a dangerous central bank game of print, print, PRINT! We’ve seen this happen in Europe, the USA, Japan and most every other country, and it has only produced prolonged economic agony.

But for now, for the expat, savvy advice would be to take advantage of the current strength of the KRW and send any surplus cash home to try and beat the currency devaluation.

Another option is to invest in solid commodities and other investments that are not reliant on the performance of companies.

Essentially the Korean Won just like every other currency on the planet is given value by the regulation of its supply. However with the PGH administration determined to kick the blame down the road for the economy, it means that `financial stimulus’ or `deficit spending’ or the `supplementary budget’ (all of which are the same thing)  will most certainly affect everybody on the peninsula. In particular the expat who is often over here to save money to send home.

currency devaluation

 

One Response

  1. Kim Goodall
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    The “conventional wisdom” in Korea is that currency devaluation is “good.” Things are much more complex than that. It’s only beneficial for those who rely on exports. The mindset that many Koreans have is that exports are the only thing that matters. That’s what the chaebols want them to believe. But for the Korean middle and lower classes, the devaluation costs them in lost spending power. Prices will increase, especially on imported goods, but salaries will lag behind.
    Essentially the larger exporters benefit while average Koreans pay the price.

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