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Do posters understand why defaulting and reverting to an old currency is near-impossible?


feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
I've posted on this before and the ignorance of this topic is alarmingly widespread, given how eager people are to opine on the matter.

Posters appear to have this idea that a small nation like Ireland or Greece or Portugal can simply exit the Euro, set up a new version of their old currency, and merrily continue trading.

Sadly, it's not that simple.

We can, of course, introduce a new currency, but the problem is when we try to buy stuff using the new currency.

Market speculators can, and will, chew this new currency to shreds. The only way to prevent this is by having a huge mountain of money, several tens of billions of US dollars, to use to defeat the speculators. But, paradoxically, if we had such a mountain of money, we wouldn't be in a crisis.

One easy way for speculators to kill the new currency is via naked short selling.

Short selling is a trick that speculators use to profit from a fall in the price of an asset. Imagine you know the Japanese yen is going to fall in price by 10%. To profit from this, you borrow a billion yen from a bank, for example, with a promise to return the yen 10 days later. Then you sell the yen for US$100m. Then the yen falls 10%. You buy back the billion yen for US$90m. Then you give back the billion yen to the bank, and keep the US$10m.

The naked version of the above short sale is the same, except you don't have any yen. Instead of trading actual yen, you trade a contract, a promise, to supply yen. It's not entirely different to bluffing in poker. You convince the opponent that you have a great hand, even though you have nothing, and you gain lots of money despite having a losing hand.

As investopedia points out, "Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns."

So what happens to a Wall Street trader who is discovered illegally selling short naked? Typically, he will be fined maybe $200,000, which his multi-billion-dollar employer will pay. Then he'll go back to business as usual. So the fact that it is technically illegal is very, very, VERY little protection.

So how do you fight a naked short seller who wants to force down the value of the Punt Nua? The same way you fight a bluffer in poker: you put down the money to see his hand.

And what if you don't have enough money to see him? The bluffer wins.

So for Ireland or Portugal or Greece to set up a new currency on their own, they need to have a big mountain of US dollars to call the bluff of the short sellers.

Imagine we want the punt nua to be worth half a dollar, in order to make our exports more competitive. But the short sellers offer eighty billion punt nua for only $20bn US dollars. If we had $20bn US dollars, we could call their bluff. The short sellers would be forced to find eighty billion punt nua in order to honour the contract. They would have to pay a premium to get the eighty billion punt nua.

But if the Irish central bank doesn't have the $20bn US dollars, they can't call the bluff, and this kind of process can force down the value of the punt nua until it's totally worthless.

This is why I've suggested pooling our resources with other nations in a debt crisis. By putting our resources together, we could have enough reserves to maintain the value of the new currency.

This would only be temporary, for about a decade. We would use this time to build up a large US dollar reserve (like China did). Then, Portugal and Greece could re-launch their own currencies, with enough reserves to defend them.

But right now, none of us have sufficient reserves to defend a new currency on our own, so either we pool our resources, or we just accept Germany's current programme of never-ending economic collapse.
 


Howya

Well-known member
Joined
Feb 29, 2012
Messages
1,690
The title includes a reference to defaulting which is not necessarily connected to establishing a new currency. However, the main problem with the argument is that it assumes that the central bank has a pre-determined view of the value of punt nua relative to the euro or US$. I would argue that there should be no such pre-determination. Instead, if (a big IF) we went down this route, then the currency should be allowed to free float. There is no reason to support a particular currency value - we are not in the old ESM or fixed rate regime. The speculators can bet against each other. Our exports will benefit. The down side is that import costs will rise rapidly forcing up inflation.
 

Shpake

Well-known member
Joined
Oct 17, 2012
Messages
5,326
I sure hope we are on the right road.
I think this will only be clear as the years go by. Time will tell. It would seem that there are winners and losers in every policy and in every system. The winners here are those in permanent employment such as the high tech sector and pharmacy as long as they can hold down their jobs. The 14% who might find work in the tourist, low tech manufacture, construction etc. will not be helped by the high value of the euro. Some of the profits of doom... sorry prophets of doom foretell a decade of low growth, high unemployment and probable emigration. I aggree to leave the euro would result in a sytemic shock... which one is worst? you're asking the wrong person.... and the ones who say they know are probably protecting their lobby or interest group.
 

Trainwreck

Well-known member
Joined
Sep 6, 2012
Messages
26,763
I've posted on this before and the ignorance of this topic is alarmingly widespread, given how eager people are to opine on the matter.

Posters appear to have this idea that a small nation like Ireland or Greece or Portugal can simply exit the Euro, set up a new version of their old currency, and merrily continue trading.

Sadly, it's not that simple.

We can, of course, introduce a new currency, but the problem is when we try to buy stuff using the new currency.

Market speculators can, and will, chew this new currency to shreds. The only way to prevent this is by having a huge mountain of money, several tens of billions of US dollars, to use to defeat the speculators. But, paradoxically, if we had such a mountain of money, we wouldn't be in a crisis.

One easy way for speculators to kill the new currency is via naked short selling.

Short selling is a trick that speculators use to profit from a fall in the price of an asset. Imagine you know the Japanese yen is going to fall in price by 10%. To profit from this, you borrow a billion yen from a bank, for example, with a promise to return the yen 10 days later. Then you sell the yen for US$100m. Then the yen falls 10%. You buy back the billion yen for US$90m. Then you give back the billion yen to the bank, and keep the US$10m.

The naked version of the above short sale is the same, except you don't have any yen. Instead of trading actual yen, you trade a contract, a promise, to supply yen. It's not entirely different to bluffing in poker. You convince the opponent that you have a great hand, even though you have nothing, and you gain lots of money despite having a losing hand.

As investopedia points out, "Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns."

So what happens to a Wall Street trader who is discovered illegally selling short naked? Typically, he will be fined maybe $200,000, which his multi-billion-dollar employer will pay. Then he'll go back to business as usual. So the fact that it is technically illegal is very, very, VERY little protection.

So how do you fight a naked short seller who wants to force down the value of the Punt Nua? The same way you fight a bluffer in poker: you put down the money to see his hand.

And what if you don't have enough money to see him? The bluffer wins.

So for Ireland or Portugal or Greece to set up a new currency on their own, they need to have a big mountain of US dollars to call the bluff of the short sellers.

Imagine we want the punt nua to be worth half a dollar, in order to make our exports more competitive. But the short sellers offer eighty billion punt nua for only $20bn US dollars. If we had $20bn US dollars, we could call their bluff. The short sellers would be forced to find eighty billion punt nua in order to honour the contract. They would have to pay a premium to get the eighty billion punt nua.

But if the Irish central bank doesn't have the $20bn US dollars, they can't call the bluff, and this kind of process can force down the value of the punt nua until it's totally worthless.

This is why I've suggested pooling our resources with other nations in a debt crisis. By putting our resources together, we could have enough reserves to maintain the value of the new currency.

This would only be temporary, for about a decade. We would use this time to build up a large US dollar reserve (like China did). Then, Portugal and Greece could re-launch their own currencies, with enough reserves to defend them.

But right now, none of us have sufficient reserves to defend a new currency on our own, so either we pool our resources, or we just accept Germany's current programme of never-ending economic collapse.

Let them keep short selling. The lower the currency goes the more enticing our exports are, the more is purchased the larger the weight of money leaning against the short sellers.

It is for this scenario that Maynard Keyenes uttered his famous words "the market can stay irrational longer than you can remain solvent".


You strike me as a young pup who has only ever experienced the artificial exchange rate regimes of the EMS/ERM/Euro.
 

Eoin Coir

Well-known member
Joined
Jun 16, 2012
Messages
16,604
I agree it is almost impossible. But it makes good therapy for insomniacs and those loons at home on the keyboard in their pyjamas in the middle of the day.
 

feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
The title includes a reference to defaulting which is not necessarily connected to establishing a new currency. However, the main problem with the argument is that it assumes that the central bank has a pre-determined view of the value of punt nua relative to the euro or US$. I would argue that there should be no such pre-determination. Instead, if (a big IF) we went down this route, then the currency should be allowed to free float. There is no reason to support a particular currency value - we are not in the old ESM or fixed rate regime. The speculators can bet against each other. Our exports will benefit. The down side is that import costs will rise rapidly forcing up inflation.
You're missing most of the downside: if we are unable to afford imports of oil, our economy will stop dead.

We HAVE to maintain the value of the currency so that it is sufficient to allow companies to continue running. We are a widely-dispersed population and over 98% of businesses will be unable to remain in business if a fall in the currency means we cannot import sufficient petroleum to keep things moving.

Your post apparently assumes that, for no particular reason, the longs will balance out the shorts in the medium term. But 2009 is proof positive that that is simply not what happens. Sometimes the shorts just win outright.

The Argentine peso has remained very steady for most of the last decade. Is this because the markets found that level? No. It's because the Argentine central bank threw mountains of foreign reserves into preventing an exchange rate crisis.

If you don't have that, forget about having a reliable supply of necessary imported commodities.
 

feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
Let them keep short selling. The lower the currency goes the more enticing our exports are
How do we get our exports out of the country if we can't afford petrol?

How will we manufacture the exports and get them to the port, without petrol?

How do workers get to the factory to produce the export goods, without petrol?
 

kerdasi amaq

Well-known member
Joined
Aug 24, 2009
Messages
4,684
My, oh my, how did we ever manage when we had our own currency?

We will not be buying foreign goods with Punt nua.

You know, it's possible that a Punt nua could be like the Swiss Franc.
 

Ulster-Lad

Well-known member
Joined
Oct 26, 2006
Messages
10,092
How do we get our exports out of the country if we can't afford petrol?

How will we manufacture the exports and get them to the port, without petrol?

How do workers get to the factory to produce the export goods, without petrol?
The government could lower their 70% take on every litre of fuel. ;)
 

Trainwreck

Well-known member
Joined
Sep 6, 2012
Messages
26,763
How do we get our exports out of the country if we can't afford petrol?

How will we manufacture the exports and get them to the port, without petrol?

How do workers get to the factory to produce the export goods, without petrol?
We can get petrol. For example, you relaise that a 50% depreciation in a new Punt, would translate to probably a €2.20 litre price fro petrol at the pump. Tough indeed, but not armageddon and it would come down as the currency bounced back under a surge of export activity. Don't forget there would be NO impact on the cost of transport to the buyers. The price of oil in THEIR currency terms would not be changed so would have a zero effect on the prices they pay for our exports - while the price of the exports themselves produced in Ireland would plummet.


You are right it would be messy for a while, but allowing prices to free themselves it would correct faster than you think (Ok, assuming there isn't a policy **** up) and it would be hunky dory and of massive net benefit to us.


Alternatively we cn sit in this depressionary quagmire for another decade or two or three.
 

feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
My, oh my, how did we ever manage when we had our own currency?
My recollection is that the Central bank had big reserves which it used to fight speculators.
 

Howya

Well-known member
Joined
Feb 29, 2012
Messages
1,690
You're missing most of the downside: if we are unable to afford imports of oil, our economy will stop dead.

We HAVE to maintain the value of the currency so that it is sufficient to allow companies to continue running. We are a widely-dispersed population and over 98% of businesses will be unable to remain in business if a fall in the currency means we cannot import sufficient petroleum to keep things moving.

Your post apparently assumes that, for no particular reason, the longs will balance out the shorts in the medium term. But 2009 is proof positive that that is simply not what happens. Sometimes the shorts just win outright.

The Argentine peso has remained very steady for most of the last decade. Is this because the markets found that level? No. It's because the Argentine central bank threw mountains of foreign reserves into preventing an exchange rate crisis.

If you don't have that, forget about having a reliable supply of necessary imported commodities.
My post included the issue of imports. There have been plenty of currency depreciations over the decades (including our own in the 1990's). I am not necessarily advocating a new currency, just pointing out that some of your initial assumptions should be questioned.
 

feargach

Well-known member
Joined
Dec 11, 2006
Messages
4,995
The government could lower their 70% take on every litre of fuel. ;)
How would that persuade Saudi oil exporters to sell their petrol to Ireland.

The Saudis don't pay that tax. It is irrelevant to them.

The problem persists even if we reduce our tax on fuel to 0%
 

SilverSpurs

Well-known member
Joined
Nov 27, 2009
Messages
5,550
You only have a problem when you attempt to peg your currency at an unrealistic level e.g. our Deutchmark peg in the early 90's. The Swedish Krona free floats without a problem, sterling went from 1.50 down to 1.02 in six months without a problem.
By the OP's arguement how did Finland and Sweden trade after they devalued their currencies in the early 90's after their bankign collapse???
 

Ulster-Lad

Well-known member
Joined
Oct 26, 2006
Messages
10,092
How would that persuade Saudi oil exporters to sell their petrol to Ireland.

The Saudis don't pay that tax. It is irrelevant to them.

The problem persists even if we reduce our tax on fuel to 0%

You do understand that the cost of a litre of petrol in Ireland is about 50 cents right now?? It cost us €1.65 at the pump due to tax.
 

Socratus O' Pericles

Well-known member
Joined
Oct 12, 2009
Messages
33,556
Do posters understand why defaulting and reverting to an old currency is near-impossible?

No-they don't.
 

SilverSpurs

Well-known member
Joined
Nov 27, 2009
Messages
5,550
Anyway the dollar is the currency of international trade not the euro so the OP is all nonsense.
 

pragmaticapproach

Well-known member
Joined
Jul 21, 2010
Messages
8,817
I've posted on this before and the ignorance of this topic is alarmingly widespread, given how eager people are to opine on the matter.

Posters appear to have this idea that a small nation like Ireland or Greece or Portugal can simply exit the Euro, set up a new version of their old currency, and merrily continue trading.

Sadly, it's not that simple.

We can, of course, introduce a new currency, but the problem is when we try to buy stuff using the new currency.

Market speculators can, and will, chew this new currency to shreds. The only way to prevent this is by having a huge mountain of money, several tens of billions of US dollars, to use to defeat the speculators. But, paradoxically, if we had such a mountain of money, we wouldn't be in a crisis.

One easy way for speculators to kill the new currency is via naked short selling.

Short selling is a trick that speculators use to profit from a fall in the price of an asset. Imagine you know the Japanese yen is going to fall in price by 10%. To profit from this, you borrow a billion yen from a bank, for example, with a promise to return the yen 10 days later. Then you sell the yen for US$100m. Then the yen falls 10%. You buy back the billion yen for US$90m. Then you give back the billion yen to the bank, and keep the US$10m.

The naked version of the above short sale is the same, except you don't have any yen. Instead of trading actual yen, you trade a contract, a promise, to supply yen. It's not entirely different to bluffing in poker. You convince the opponent that you have a great hand, even though you have nothing, and you gain lots of money despite having a losing hand.

As investopedia points out, "Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns."

So what happens to a Wall Street trader who is discovered illegally selling short naked? Typically, he will be fined maybe $200,000, which his multi-billion-dollar employer will pay. Then he'll go back to business as usual. So the fact that it is technically illegal is very, very, VERY little protection.

So how do you fight a naked short seller who wants to force down the value of the Punt Nua? The same way you fight a bluffer in poker: you put down the money to see his hand.

And what if you don't have enough money to see him? The bluffer wins.

So for Ireland or Portugal or Greece to set up a new currency on their own, they need to have a big mountain of US dollars to call the bluff of the short sellers.

Imagine we want the punt nua to be worth half a dollar, in order to make our exports more competitive. But the short sellers offer eighty billion punt nua for only $20bn US dollars. If we had $20bn US dollars, we could call their bluff. The short sellers would be forced to find eighty billion punt nua in order to honour the contract. They would have to pay a premium to get the eighty billion punt nua.

But if the Irish central bank doesn't have the $20bn US dollars, they can't call the bluff, and this kind of process can force down the value of the punt nua until it's totally worthless.

This is why I've suggested pooling our resources with other nations in a debt crisis. By putting our resources together, we could have enough reserves to maintain the value of the new currency.

This would only be temporary, for about a decade. We would use this time to build up a large US dollar reserve (like China did). Then, Portugal and Greece could re-launch their own currencies, with enough reserves to defend them.

But right now, none of us have sufficient reserves to defend a new currency on our own, so either we pool our resources, or we just accept Germany's current programme of never-ending economic collapse.
You've obviously never heard of competing currencies. No need to reintroduce the punt, just allow people to use whatever currency they wish. I suspect most people would continue using euros, but they would be free to use sterling or any other currency when pricing goods or negotiating wages.

The first step would be to ease legal tender laws and abolish taxes on silver and gold.
 

R3volution_R3ady

Well-known member
Joined
Sep 17, 2012
Messages
2,368
You've obviously never heard of competing currencies. No need to reintroduce the punt, just allow people to use whatever currency they wish. I suspect most people would continue using euros, but they would be free to use sterling or any other currency when pricing goods or negotiating wages.

The first step would be to ease legal tender laws and abolish taxes on silver and gold.
That's what people can't understand.

They've been so indoctrinated into thinking in terms of a money monopoly, that anything to the contrary must, by default, equate leaving the Euro and then establishing the exact same money monopoly in Ireland. Why would we want to go from one central bank system to another central bank system? Both are one and the same. If tender laws are abolished, you have a situation where people will start using gold and silver, commodity backed currencies. A free banking system would spring up overnight.

The majority cannot even contemplate thinking outside the box. A free banking and monetary system they don't realise, would be unequivocally different than any system in motion now that the contrast is simply day and night.
 

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