If a country prints money and distributes it between the people, it causes inflation. But what if a country prints its own money to spend ONLY abroad, which would allow a country to buy whatever it wants. What's wrong with this logic?
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$\begingroup$ You might be interested in the Koban. $\endgroup$– TheraotCommented Jul 22, 2019 at 8:45
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$\begingroup$ Where do you think that country is going to spend that money? $\endgroup$– AronCommented Jul 22, 2019 at 10:12
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3$\begingroup$ You might be interested: Why can't countries print another country's currency? economics.stackexchange.com/questions/19774/… $\endgroup$– AllureCommented Jul 23, 2019 at 1:13
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4 Answers
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In order for one country to spend in another, it needs to exchange its currency for the currency of the other nation. This is done through something called the foreign exchange market. Like most markets however, the laws of supply and demand apply here too. If a country suddenly starts printing a lot of money, the actual value of its money in the foreign exchange market will go down (due to its increased supply). This will ultimately mean the currency will depreciate with respect to others, and will thus have lower buying power.
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9$\begingroup$ A difficult issue is that if I go abroad and give somebody bits of paper in exchange for stuff, the person accepting the pieces of paper presumably needs to find some value in them. If they have no intrinsic or exchange value (they apparently cannot be used in my country to buy stuff) then I am unlikely to be able to use them. On the other hand, if my money has some kind of intrinsic value as silver trade dollars did, then they may prove to be acceptable $\endgroup$– HenryCommented Jul 21, 2019 at 21:26
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17$\begingroup$ @Henry Please post answers as answers. $\endgroup$– GiskardCommented Jul 21, 2019 at 22:28
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1$\begingroup$ @Henry Yes, but that goes against the basic premise of the question - if you could print silver coins the way you print fiat money, they would be just as worthless (without the country guaranteeing their value etc. etc.). $\endgroup$– LuaanCommented Jul 23, 2019 at 9:42
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$\begingroup$ @Henry, What makes you think silver has intrinsic value? $\endgroup$ Commented Jul 24, 2019 at 19:58
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$\begingroup$ @eclipz905 - I don't particularly apart from its use in photography, jewellery and tableware, but the 19th century Chinese did. It was their refusal to accept much else in trade which led to various conflicts in that period $\endgroup$– HenryCommented Jul 24, 2019 at 20:14
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This wouldn't work - for the money to have any value abroad, it has to find its way back to the source country.
Consider an example; the President of Ruritania wants a Swiss watch. He prints a thousand Ruritanian dingbats and sends them to his ambassador in Bern with the instruction to buy him a watch. However, the Swiss watch-maker doesn't want to be paid in dingbats - he wants Swiss Francs. So the ambassador goes to a Foreign Exchange (Forex) broker and asks to buy Swiss Francs using Ruritanian dingbats. What rate does the Forex broker give him? The broker has to consider what he could do with the dingbats - all he can do is sell them to some Swiss guy who needs dingbats for some reason. So it's the demand for dingbats in Switzerland that determines the rate.
Let's assume the Forex broker gives the ambassador some Swiss Francs and off he goes and gets the watch. What happens next? The broker sells the dingbats to a Swiss importer who is buying Ruritanian apples. The Swiss guy uses the dingbats to pay his supplier in Ruritania and now, the dingbats have ended up back in Ruritania!
So the Ruritanian money supply has increased and, despite the best efforts of the President, inflation is stoked.
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$\begingroup$ Ruritania could make purchasing with RD illegal internally, but then the RD would have value to almost no one. $\endgroup$ Commented Jul 24, 2019 at 13:16
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4$\begingroup$ @IllusiveBrian Exactly. If it were illegal to spend dingbats in Ruritania, there would be no reason for anyone abroad to buy them. So the Forex broker would not be able to sell them at any price. Therefore he would not take them off the ambassador, who would not be able to get his Swiss Francs. So the President would remain watchless. The whole scheme can't work. $\endgroup$ Commented Jul 24, 2019 at 14:46
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China does, in fact, do something like this! It has two currencies - one for use internally and one internationally. It was explained better than I could by Adam Townsend on Twitter: https://twitter.com/adamscrabble/status/1094717028009689089
Thread unrolled: https://threadreaderapp.com/thread/1094717028009689089.html
The ‘onshore’ currency is the Renminbi (RMB) or yuan and also called the CNY. It is only used to pay bills on the mainland. The onshore currency can’t be used for international transactions. There... is no real market for the exchange rate, instead the People’s Bank of China (PBOC) comes up with a price every day thru an unknown equation, and then trades around it.
The “offshore” currency, also called the yuan or CNH, is used for international clearing and trading.
The CNH has a completely separate set of demand and supply conditions from the onshore RMB.
The Chinese have it both ways, huge inner stimulation to appease the people. Strong external currency to maintain purchasing power outside. By controlling the supply of CNH (offshore money) outstanding China can create a CNH shortage. They’d just buy the offshore currency to drive the value/price up. Alternatively they can sell the offshore currency, flooding the market with CNH to drive the value/price down. For example, when a foreign Purchaser of goods has to settle the transaction, and there’s a shortage of settlement currency (CNH), his/her cost goes up.
Conversely, if there are boatloads of CNH available his/her cost goes down.
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11$\begingroup$ We're looking for full answers here, rather than pointers elsewhere. Also, Townsend's case completely falls apart: just look at the history of the CNH-CNY exchange rate, which is pretty much static. Just because Townsend writes long tweet threads and sounds clever, doesn't mean he knows what he's talking about. $\endgroup$– 410 goneCommented Jul 22, 2019 at 7:53
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$\begingroup$ What foreign purchaser of Chinese goods is so significant that they'd manipulate the exchange rate for just one payment? That sounds like nonsense, to me. $\endgroup$ Commented Jul 23, 2019 at 20:58
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Something close to what you want would be Special Drawing Rights, which were created by the IMF to serve as an international currency without the problem of a national currency having to both meet the needs of international trade and domestic economic goals.
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3$\begingroup$ Perhaps you could clarify how SDRs are related to the question the OP asked. SDRs aren't printed by a country, they aren't distributed to people, they aren't for spending "abroad" (or at all), and they aren't to allow a country to buy things. $\endgroup$– SneftelCommented Jul 23, 2019 at 14:04