At 06:51 21/07/2011, you wrote:
>I have always understood the problem to be inflexible exchange rates rather
>than interest rates. In a crisis an independent country usually devalues
>against the dollar. Eurozone countries just can't do this.
I can't say that this is wrong at all, but it doesn't seem to be the
whole issue, and exactly how significant it is I still don't know.
If you borrow say 1 Billion dollars when the exchange rate is 10
godzillas to the dollar, and you devalue your currency by 10% so that
it's 11 godzillas to the dollar, you need to raise 11 billion
godzillas instead of 10 billion godzillas in order to repay the loan.
Of course if you've sold godzilla bonds rather than borrowing in
dollars, then you have reduced your debt BUT you've also made it much
more difficult to borrow any more money unless you pay way higher
rates of interest - because no-one will want to trust your currency.
How does this help? As far as I can understand it's the continual
need to borrow more money that is the problem. It's as if one of us
who had a mortgage had to keep renegotiating the mortgage every few
weeks or months.
Well still questions, but now I feel happy because it's reminded me
that we paid off our mortgage this month... which is a sign of
getting old, but one that has some compensations.
Anyway thanks for the point.
Julian
Winter is Coming
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