Numerous countries have histories related to economic devaluation. Indeed, yours does too. But do you know what devaluation is?
It’s an economic phenomenon known to all, although, for some reason, many people don’t fully understand it.
It causes many economies worldwide to collapse in the face of other currencies, such as the US dollar.
It causes the debts of ordinary citizens, entrepreneurs, and investors to multiply quickly, making it difficult to meet obligations.
This often leads to higher prices, both for products and services, creating uncertainty in global markets.
Do you want to protect your money against potential losses? Here, you will find 4 tips so devaluation doesn’t affect you as much. Keep reading this article.
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What is devaluation?
This term, often mentioned by economists, refers to the loss of value suffered by a particular currency compared to others of higher cost.
Why does it happen? Various factors contribute to devaluation. Among them is the deliberate action of a government to boost exports.
Sometimes, it is used to spur local production and minimize a country’s deficit or commercial debt.
By devaluing the currency, foreign products become more expensive, and citizens prefer to buy domestic products at a better price.
This is supposed to help stimulate the economy. Why? More money is circulating within the territory, and exports are increasing.
Additionally, over time, payments of sovereign debts become cheaper. Other causes of devaluations include distrust in the local currency and capital flight.
Types of devaluation
Do you already understand what devaluation is? Excellent. Now, let’s review how monetary loss is classified to help you understand it better.
External
This type is commonly used to decrease prices and regain lost competitiveness.
The idea is to promote increased exports when internal production costs are too high.
This makes goods and services more expensive internationally and loses buyers.
Therefore, this devaluation mechanism is usually implemented in nations seeking to revive their economy.
However, only those who do not share their currency with other territories can use it. Can you imagine the complexity of implementing it in the Eurozone?
The European Union has a single monetary policy since the member countries adopted the euro as their official currency.
Internal
In contrast to the previous type of devaluation, internal occurs in scenarios with a common currency.
Such is the case of the Eurozone, where it is impossible to develop a monetary strategy, as mentioned.
This is because it is challenging to convince all the countries that are part of it to devalue their single currency.
So, what do they do to improve competitiveness? They adopt measures to reduce their production costs directly.
These include reducing wages, taxes, the cost of public services, and adjustments in rents, among others.
In the end, the objective of internal devaluation is the same as that of external: to increase exports by lowering goods and services.
Competitive
Now, you probably want to know what competitive devaluation is. It’s quite simple to understand.
It occurs when nations compete with each other to gain a better position in the international market.
Each pursues a low currency value to optimize exports and foreign investment.
This strategy is also known as “currency war” because of the competition it generates between countries.
This is because the share they gain from this policy is taken from other nations, which may take similar actions.
The economic impact of this type of devaluation is temporary. It is minimized when other governments make monetary maneuvers.
Fiscal
This devaluation also seeks economic competitiveness to maximize exports and reduce production costs.
It involves altering the prices of various taxes, especially those related to productivity.
The intention is to make the national industry more competitive than the foreign one without causing a direct depreciation of the currency.
To achieve this and make exports more attractive, changing both direct and indirect taxes is necessary.
Companies also reduce the expenses to maintain their production by paying fewer taxes for their employees.
However, the Value Added Tax can be increased to compensate for the fall in tax revenues.
Example of devaluation
China is one of the countries that has increased its GDP and its position as a global leader in trade through the practice of monetary devaluation.
According to the CFI portal, in 2016, it was reported that it planned to revalue the value of its currency after the US presidential elections.
However, in response to the attempt to match the dollar, then-President Donald Trump imposed tariffs on products from that country.
Brazil also heavily devalued the real in the past, which caused its value to collapse in 2011 and many other difficulties, including the decrease in crude oil prices and raw materials, as well as corruption problems.
Another example is the decision taken by Egypt to reduce the value of its pound by 14% compared to the US dollar.
Consequences of devaluation: How does it affect you?
Devaluation can have a positive or negative impact, depending on each country’s economy and the objectives they want to achieve.
Generally, it directly affects prices and creates an inflationary effect, so the value of your money is diminished.
Therefore, it becomes more difficult for you to buy imported products as they become increasingly expensive. In addition, your salaries and savings are worth less.
You notice devaluation when you travel to another country with a stronger currency and are forced to spend more to match it.
Another consequence is the reduction of the actual value of debt, which can be positive for debtors and negative for lenders.
On the other hand, it encourages the purchase of local products by foreign countries, and tourism is encouraged.
4 Tips to protect yourself from devaluation
If you really want to protect your money from monetary loss, you will have to do more than just save it.
These measures can help you defend yourself from devaluation if it occurs. Take a look.
1. Invest in other currencies
Funds denominated in different foreign currencies are a good option to protect your money in such environments.
Consider acquiring currencies different from the local ones that allow you to yield your capital, such as the US dollar or the euro, as they are strong.
That is, they are reasonably stable and accepted worldwide, so you will have no trouble making transactions with them.
With this investment, you avoid losses due to constant fluctuations in exchange rates when buying or selling.
Therefore, it is an effective strategy to mitigate exchange losses and maintain your purchasing power.
2. Invest in real estate
Real estate investments also offer incredible benefits when protecting your finances. Why is that?
They generate constant passive income. Their value always increases, which can be crucial to wealth in the long term.
You could place your money in a portfolio where different types of assets are distributed, such as real estate and funds.
This way of investing provides you with security and greater control as the value of properties continues to grow.
If you can invest in real estate, do it, even if you don’t use them as your residence. These assets will protect you from devaluation.
3. Invest in securities
Another way to secure your economy is with investments in securities. Do you know what this option means?
Buying assets or capital from the money market, taking into account their potential to increase long-term earnings.
For example, certificates of deposit, Treasury bills, bonds, stocks, and derivatives that generate significant interest.
This will help you offset any effect of currency devaluation or inflation. And to have a solid financial future.
Of course, this will depend on the risk you are willing to tolerate.
4. Examine the market
In order to make effective decisions, it’s essential to study the space where financial exchanges take place.
Information about this market empowers you, so it’s advisable to research how it works and what it facilitates.
Just as you’re doing now, read a bit more about this field and what devaluation is to ensure you preserve your money correctly.