Understanding Finance from scratch

Chapter 13 Once you see through the essence of money, you will understand the true meaning of finance——learn some currency knowledge every day (5)
We can understand this point. Perhaps the valuation of stocks is too complicated for ordinary investors, and it is a matter of course to take the absolute price as a substitute for high or low valuation.Various defects in the market make this kind of mistake not only not corrected but strengthened.But what I want to emphasize here is that the value of a stock or warrant has nothing to do with its absolute price.For a long time, the valuation of low-priced stocks in the Chinese market is not cheap, and they are often ridiculously overvalued.Any currency illusion is inherently a psychological illusion. If you recognize this illusion as soon as possible, you may be able to avoid a lot of losses.

It should also be pointed out that the appreciation of the renminbi will also bring currency illusions to ordinary people.Because according to financial common sense, the appreciation of the renminbi may nominally mean that the money in your wallet is more valuable, but one of the prerequisites for this simple calculation is that your consumption and investment must be included in the "international circulation" and produce different currencies. Otherwise, it is difficult for you to directly feel this "wealth effect".That is, if you do not intend to exchange and trade with foreign currencies, your wallet will not be bulging due to higher exchange rates.Therefore, although the Chinese are theoretically and nominally richer than before, you can only buy domestic goods of the same value. This is the "money illusion".

Euro: Impossible Triangle and the Practice of Optimal Currency Area Theory

Since 1999:1 on January 1, 2002, the euro has been introduced into the field of intangible currency (traveler's checks, electronic payments, banking, etc.); on January 1, 1, the new euro banknotes and euro coins were launched, known as the currency of the euro zone countries. legal tender.The original conversion period for banknotes and coins lasted 2 months until 2002 February 2.European countries officially stopped using the original currency as legal tender on different dates. The earliest was Germany. The Deutsche Mark ceased to be the legal tender of Germany on December 28, 2001, but it could be converted into German currency before February 12, 31 EUR.By February 2002, 2, all European countries stopped using the original currency as legal tender.However, after this date, the central banks of various countries still accept the original currency for several years, and the central banks of Austria, Ireland, and Spain accept the original currency permanently.The earliest coin to be discontinued was the Portuguese escudo, which ceased to have monetary value on December 28, 2002, while banknotes remained convertible until 2.

芬兰决定除了为收藏者而少量铸造外，不铸造1欧分和2欧分的硬币，所以在芬兰兑换欧元时，以1欧分或2欧分结尾的将舍去，以3欧分或4欧分结尾的将进位为5欧分。但是1欧分和2欧分在芬兰依然是法定货币。

The euro is arguably the most significant achievement since the monetary reforms of the Roman Empire.So how did the euro come into being?

The definition of the optimal currency area is: the general means of payment is either a single common currency or several currencies, these currencies have unlimited convertibility, and their exchange rates are pegged to each other during transactions, maintaining constant.But exchange rates between countries within the region and countries outside the region remain floating.

20s. In 60, Mundell first proposed the concept of "optimal currency area" and an economic criterion for forming a currency area, that is, the criterion of sufficient liquidity of factors.He believes that when factors can flow freely within certain regions but cannot flow between other regions, several regions with factor mobility can constitute an "optimal currency area".

20s.Because previous efforts mostly focused on the conditions for the formation of the optimal currency area, the biggest problem lies in highlighting the positive utility of the theory while ignoring the generation of costs.In the 70s, the theory turned to the cost-benefit analysis of monetary union.

The benefits of joining the currency area are: ①Reduce transaction costs; ②Unchanged fixed exchange rates reduce uncertainty and eliminate speculative capital flows between partner countries; ③Save foreign exchange reserves of member countries and reduce reserve costs; ④ Currency integration can promote the integration of economic policy.

The cost of joining the currency area includes: ① individual country loses the autonomy of monetary and exchange rate policies; ② the decision-making power of national fiscal policy is affected and limited by the common monetary policy; ③ may increase unemployment; ④ may worsen the already existing There are regional imbalances.

In the 20s, economists carried out detailed empirical analysis on relevant issues of the optimal currency area by using a large number of historical economic data, and drew many meaningful conclusions.

Most notable among these is the analysis of policy coordination within the coalition and its effectiveness.Grove believes that under the premise of rational expectations and the arbitrariness of government policies, the effectiveness of a country's monetary policy can be partially or fully realized by forming a currency union with another country with a better reputation for monetary policy than the country.Grove's analysis not only provides strong theoretical support for the strengthening dollarization trend in Latin America in recent years, but also provides a reference for rebuilding the exchange rate mechanism of East Asian countries after the crisis.

Of course, there are many criticisms of the optimal currency area theory, but the failure to adapt to the development of the times and the development and changes of the theory is the main point of criticism, while the other aspect focuses on criticizing the criteria for establishing the optimal currency area.Specifically:
First, the new changes in the operating environment of the world economy and the rise of monetarism and the school of rational expectations have redefined the macro-cost of monetary union emphasized by the OCA theory, making the conclusions drawn from the cost-benefit analysis worthy of further discussion.

Second, whether it is the early optimal currency area theory or the later new theory, they only emphasize the influence of actual economic factors on the formation and joining of currency areas, but ignore the role of financial markets.

Third, some standards of OCA theory have their own theoretical weaknesses, and there are various relationships among the standards, such as substitution, intersection, causality and contradiction, which are often overlooked by people. OCA standards are endogenous, which weakens their policy applicability to a certain extent.

In general, there are still many voices who believe that the system and framework of the theory are still immature, and the clues are too complicated to sort out.

But in any case, the practice of the theory of the optimal currency area in the euro zone has indeed been realized through the integration of the European currency.The establishment of the euro area is to realize a unified market without internal borders, to realize the free flow of people, goods, services and capital; at the same time, to effectively coordinate the fiscal and monetary policies among the member states.

The circulation of the euro promotes the formation of a unified European financial market.Its successful operation also has important implications for world regional currency cooperation, that is, currency cooperation based on regional economic cooperation is necessary and feasible.

In the 20s, Mundell made a genius contribution to the study of international economics.There are two most important of them: one is the theory about the optimal currency area; and the other is the theory about the relationship between domestic economic policy and exchange rate—outlined the theory that was later summarized by Krugman and other economists as " Mundell's Impossible Triangle Theorem".It can be said that these two contributions made by Mundell in the 60s have become the theoretical cornerstones of modern international economics.

The Impossible Triangle means that it is impossible for a country to realize free capital flow, independence of monetary policy and stability of exchange rate at the same time.In other words, a country can only have two of them, but not three at the same time.If a country wants to allow capital flows, but also requires an independent monetary policy, it is difficult to maintain a stable exchange rate.If exchange rate stability and capital mobility are required, an independent monetary policy must be abandoned.

Which of these three goals is more important?If capital flow is abandoned, it will return to a closed economic system that is closed to the outside world, which is not conducive to economic growth.Abandoning exchange rate stability would be a disaster for any country. "The lesser of two evils", it is more feasible to abandon an independent monetary policy.Abandoning an independent monetary policy is also a transition to a single regional or world currency.As a result, people began to think more and more about financial globalization at the same time as trade globalization. If the currency was unified, there would be no such drawbacks as fixed exchange rates, floating exchange rates, and capital controls.

Let's take the euro as an example.Because the unified currency implemented in the Eurozone is equivalent to the 1:1 eternal and fixed currency exchange relationship implemented by each member state (that is, the common use of the euro by all member states is equivalent to the ultimate form of fixed exchange rates).Since it is the same currency, there are almost no obstacles to the flow of capital among the member states, which is equivalent to the complete free flow of capital; the existence of the European Central Bank makes each member state completely lose its independent monetary policy.The triangular combination of the euro area is a combination of fixed exchange rates, complete free capital flow, and complete loss of independent monetary policy. In fact, each member state implements fixed exchange rates at the cost of completely losing independent monetary policies.

As for any economy, or as an economy with a certain scale, domestic economic policy is always the main one. Monetary policy is a very important domestic policy, and its influence on the economy must be extremely important.The flow of capital will also drive changes in the real economy of the economy.The exchange rate is nothing more than a quantitative comparison and exchange relationship between two currencies.Therefore, among these three factors, in descending order of importance, they should be: monetary policy, capital flow, and exchange rate policy.Therefore, an economy should first fully adhere to an independent monetary policy, secondly determine the degree of freedom of capital flow, and finally consider the currency exchange relationship.However, the Eurozone has done exactly the opposite. It actually regards the fixed exchange rate as the most important thing, followed by the free flow of capital, and ignores the independent monetary policy, so that it does not need monetary policy at all.Therefore, it is not surprising that a fundamental crisis broke out in the euro zone.

Stiglitz once made a metaphor: "A small open economy is like a small boat in a stormy sea. No matter what the skill of driving the boat is, although we don't know when the boat will capsize, there is no doubt that The boat will eventually be overturned by a big wave." The important effect of economic size on stability can be observed very clearly in the currency market.The larger the economy, the less risk of speculation.The biggest advantage of a unified currency is to transfer part of the currency sovereignty in exchange for the stability of the financial system, which can prevent and resolve financial crises.

The realization of a single currency in an economic region can also improve the transparency of the monetary system.Since all countries in the unified currency area have given up their independent monetary policy, there is no possibility of a country suddenly issuing additional currency, which greatly improves the public's trust in monetary policy.A unified currency can further play the role of the market mechanism, save information costs and transaction costs, promote the flow of goods, capital, and personnel, and make resource allocation more rational.A unified currency can reduce internal friction, promote investment, and improve international competitiveness.

(End of this chapter)