Three Warning Signs of Currency Devaluation
Currency devaluation is often preceded by expansionary monetary and fiscal policies, as well as debt restructuring.
Very often, a currency devaluation will be preceded by the three following signs, sometimes simultaneously:
1. Expansionary monetary policies
When central banks:
- Lower interest rates near zero.
- Purchase any type of assets to prevent the markets from falling.
- Exercise yield curve control to avoid rising rates by any means.
2. Expansionary fiscal policies
When governments:
- Increase spending on public projects with no regard for the debt to GDP ratio.
- Take on a number of unbudgeted future spending, such as government worker pensions.
3. Debt restructuring
When you see:
- Corporate debt restructuring with a partial or total transfer to the public sector.
- A perpetual debt rollover directly financed by central banks to prevent government bonds from defaulting.
Now, do you see any of those three warning signs for currency devaluation at work today? 🧐