Economic science is filled with beautiful but obscure terms - inflation, devaluation, denomination. Nevertheless, understanding the essence of all these concepts is not as difficult as it seems. And for this it is not necessary to have a specialized economic education. In this article we will introduce the reader to the devaluation, its main types and causes. What is behind this term? And how dangerous is devaluation for the national economy?
Devaluation is … The meaning of the word
The word "devaluation" came to the Russian language from Latin. It is formed from the Latin verb valeo (“cost”, “have value”) and the prefix de-, which means lowering something. The main synonym is "depreciation." Antonym - "revaluation" (we will also talk about this term in our article).
Devaluation is a term commonly used in economic theory. However, it can be found in some other scientific disciplines. For example, in psychology and pedagogy, where it is used as the category of "devaluation of the individual." In this case, the degradation of the basic characteristics of the social nature of man (primarily spiritual and moral) is implied.
In addition, the term is also used in literary speech. Often in books and popular science articles you can find the following figurative phrases: "devaluation of the word", "devaluation of meaning", etc.
What is devaluation (in economics)?
In the early 2000s, one Russian dollar needed to pay 30 Russian rubles, today - twice as much. Nominally one thousand rubles and one thousand euros are one and the same. But in reality, there is a deep gulf between them.
So what is the essence of economic devaluation? The definition of the term is quite simple. This is the official depreciation of the domestic currency against more reliable foreign currencies (most often against the dollar or the euro). In simpler words, this economic phenomenon can be explained as follows: yesterday you could buy 10 units of a certain product on the world market for 100 rubles, and today - only 9 units of the same product.
In addition, devaluation is not only a process, but also a tool for managing the national currency. In this context, the term is used in scientific papers and reports of the IMF (International Monetary Fund).
Currency devaluation almost always leads to an increase in the price of essential goods (in particular, food) and real estate. Often, devaluation is followed by its faithful companion - inflation, and prices for absolutely all goods and services in the country increase.
Devaluation and inflation: correlation of concepts
Inflation is also associated with a decrease in purchasing power. But its main difference is that it depreciates the national currency in the domestic market (that is, in relation to local goods and services), but the devaluation does the same with the domestic currency on the world stage.
Very often it is the devaluation that is primary, causing inflation. But these two processes can exist autonomously. Thus, devaluation is possible without inflation in the event that foreign currencies at this moment are subject to deflation (a decrease in the general price level).
Devaluation is always a strong (very tangible), large-scale and long-term decline in the national currency. Inflation, in turn, is often short-term and can capture only certain regions of a given state. Plus, inflation is always a spontaneous and uncontrolled phenomenon, unlike devaluation, which can be caused artificially.
Devaluation and revaluation
Revaluation is a phenomenon diametrically opposed to devaluation. Its definition can be summarized in the following way: it is the rise (strengthening) of the national currency exchange rate. What does this mean for ordinary citizens? First of all, for them it is an incentive to acquire foreign currency, which is losing its position.
The national economy as a whole revaluation promises stability and prosperity. In other words, foreign investors will come to the country and invest their money in local enterprises and projects.
But revaluation has its own negative side. So, its excessively high rates will absolutely not contribute to the growth of the national economy. After all, imported goods will flood into the domestic market, which will certainly hit domestic producers.
Reasons for devaluation
The depreciation of the national currency can be caused by both macroeconomic and domestic political factors. For example, devaluation is often the result of the planned actions of regulatory authorities in a given state. In this case, it will be considered artificial.
Let's list the possible objective reasons for the devaluation:
- Military actions and conflicts.
- International sanctions.
- Massive outflow of capital abroad.
- A sharp drop in prices of raw materials exported by the state.
- Reduction in bank lending in the country.
- General economic or political instability.
- The inclusion of the "printing press".
- Seasonal factors (for example, a temporary decrease in business and entrepreneurial activity).
Many people ask a legitimate question: is it possible to somehow protect my funds from devaluation? There are at least two ways to save your hard-earned money:
- Savings are best kept in a solid, stable currency.
- In any case, money should not be stored “under the mattress”. They need to be invested in something (at least in the bank so that deposit interest covers possible fluctuations in the exchange rate).
Devaluation and its consequences
It is easy to guess that when the national currency depreciates, those enterprises that purchase raw materials for their production cycles abroad suffer most. This will invariably lead to a significant increase in the cost of their final product.
In general, the following negative consequences of devaluation for the national economy can be distinguished:
- Significant increase in inflation.
- Decrease in confidence in the domestic currency among the population.
- Total suspended animation (slowdown) of all business activities.
- Depression in the financial sector of the country.
- Rising prices for imported goods and, as a consequence, import substitution.
- The risk of bankruptcy of those enterprises that operate on foreign raw materials or equipment.
- Depreciation of deposits in national currency.
- Decrease in purchasing activity of citizens.
However, devaluation also has its positive aspects. But we will talk about them a little later.
Devaluation types
In economic theory, there are two main types of devaluation:
- Official (or open).
- Lurking.
With an open devaluation, the country's main financial institution officially announces a depreciation of the national currency. Moreover, all the nuances and all changes in the exchange rate are completely open to the public. At the same time, impaired banknotes are either withdrawn from circulation or exchanged for new ones. Open devaluation, as a rule, occurs rather quickly - in just a few hours.
Hidden devaluation takes place without any public statements or comments from the authorities. At the same time, impaired money is not withdrawn from circulation. Such devaluation can continue for quite a long time, up to several years in a row.
An open devaluation most often causes a decrease in prices for goods, but a closed devaluation, on the contrary, provokes their rapid growth.
Examples of economic devaluation
A striking example of devaluation in Europe is the sharp drop in the pound and the Italian lira in the early 1990s (in relation to the German mark - by 12% and 7%, respectively). After that, by the way, both Italy and Great Britain announced their withdrawal from the European monetary system.
What year was the ruble devaluation? Since 1991, there have been at least three such episodes: in 1994, 1998 and 2014. The ruble, by the way, is one of the oldest European currencies. For the first time his course was determined in the XIII century. However, today it can hardly be included in the list of hard currencies in Europe.
October 11, 1994 entered the history of Russia as “Black Tuesday”. Then the Russian ruble made a sharp peak, collapsing as much as 27% in one day. The country plunged into a period of chronic inflation and a prolonged economic crisis. By the end of 1996, for one US dollar they gave about 5500 thousand rubles! The following year, the Russian government held a denomination, dropping three characters from this huge amount.
The latest devaluation of the ruble is still fresh in the memory of many citizens of Russia. It happened at the end of 2014. In general, this year the Russian ruble lost half of its value (the exchange rate fell from 34 to 68 rubles per dollar). The fall in oil prices and international sanctions against the background of the country's raw material economy have become the main reasons for this devaluation.
The devaluation of the ruble in 2014 shocked many. But everything, as they say, is cognized and realized in comparison. So, in Turkey, the lira continuously fell for two decades (from 1980 to 2002). During this time, the local currency rate crossed the path from 80 to 1.6 million lire per dollar.
The benefits of devaluation
The stereotype that devaluation is a real disaster and catastrophe for the national economy has firmly entrenched in the minds of many people. However, this is not quite true. Rather, devaluation is not always and not for everyone. We will deal with this issue in more detail.
First of all, during the devaluation, demand for domestic products is growing. The explanation is simple: owners of a depreciated national currency can no longer afford imported goods and are beginning to look closely at similar products produced at home. This may ultimately lead to increased competitiveness of the national economy. But only on condition that the authorities simultaneously carry out real and structural reforms.
There are several more possible positive aspects of devaluation. Among them:
- The growth of domestic production.
- Reducing the balance of payments deficit.
- Reducing the rate of waste of gold and foreign exchange reserves of the state.
Who is at a loss and who is at a profit?
The beneficiaries of the devaluation are, first of all, exporting companies that pay taxes and wages to their workers in national currency, and receive revenue in foreign currency. In particular, the economies of those countries whose production is focused on the export of raw materials and cheap products are benefiting. It is appropriate to cite China as an example. As soon as the economy of the Middle Kingdom began to slow down, the country's government immediately began to artificially devalue the renminbi.
All other market participants, alas, can be classified as losers. And the most vulnerable are ordinary ordinary citizens who are directly affected by rising prices for consumer goods. According to them, devaluation always hits hardest.
