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On State Intervention and the NLG & BEF rates

Introduction
Literature
Methodology
Results
My conclusions

Disclaimer: Theories used are real life theories. These do not necessarily have to apply to eRepublic mechanics – although I must say they did prove value in previous articles. All prices, rates, products, etc. used in this article were valid on the time of writing this article, but might vary over time.

Introduction

Dear reader,

As Minister of Finance, I did the best I could to stabilize the rate of the NLG. The new Minister of Finance, Mitch Rapp has continued this by asking eUNL citizens to put up their gold on the market, besides the government offers. But does this state intervention really help? Does it make the NLG, and thus the eUNL economics expressed in gold, stronger?

Some time ago, I wrote an article about how the monetary market more or less worked. In there, I mentioned a theory of Dr. Frank Shostak, and since then I always wanted to work that out a bit. I will then use it to look at the impact of government intervention.

Literature

Because I have have described it before, I will not go in too much detail. Basically the message of Shostak’s theory – the ‘purchasing power parity – is, that if you know the rate of a foreign currency to gold, and the prize of a product in that country and your own country, you can calculate the rate of your own currency to gold.

In the article, I took the example that if 1 Q1 food is 1.21 NLG, and 0.70 FRF. Then 1.21 NLG = 0.70 FRF, and – as the FRF rate was 1 FRF = 0.022 G – the NLG should be 0.0154 G, which was quite accurate.

Now, what would happen if I calculate the rate for all available products in several foreign markets, compare that to the NLG and BEF product prices on the markets, take the average of all those outcomes and – in that way – calculate the expected rates?

Exactly; first of all, I’ll spend way too much time on calculating, and second of all, we’ll have a better estimate. So here it goes…

Methodology

I will use Excel to do the calculations for me. Building a sheet with some formulas at the right place should enable me to only fill in the foreign countries, foreign exchange rates, and the prices of the products.

So I will use all products in a country, taking the cheapest price. However, if a product is not sold in eUNL and eBelgium, it’s useless to take into account, as we cannot compare them to a foreign market, and thus not calculate the correct rate. The 16 products left are:
* Foo😛 Q1, Q2, Q3, Q4 and Q5 (Belgium does not have Food Q4 and Q5)
* Weapons: Q1, Q2, Q3, Q4 and Q5 (Belgium does not have Weapons Q3, Q4 and Q5)
* Moving Tickets: Q1
* Gifts: Q1, Q2 and Q3 (Belgium does not have Gifts Q2 and Q3)
* Houses: Q3 and Q5 (Belgium does not have any Houses)

The list with countries include all countries when you search in the ranking for the 10 biggest countries, 10 countries with the most companies and 10 countries with the highest GDP. I have chosen these as they probably reflect the most efficient markets (most reflecting “perfect” markets). I will take the following 13 countries in my calculation:
* USA
* Serbia
* Spain
* Russia
* Hungary
* Poland
* Croatia
* Brazil
* Romania
* Indonesia
* Canada
* Iran
* Greece

After the calculation, we’ll have the expected rate of NLG and BEF. We can them compare them to the actual rate.

Results

The results of this are in this google doc. On top, the expected rates. Below the “box” with all product prices, and left bottom the currency to gold rates. Right bottom are the average rate expected for 1 product in 1 country for both NLG and BEF. The expected rate is calculated based on the average of all these expected rates per product/country.

We see that the NLG has an expected rate of 1 NLG = 0.0144 G, and the BEF has an expected rate of 1 BEF 0.0158 G.

If we compare this to the actual rate, we see that the NLG is at 1 G = 0.015 NLG. This is 4,17% higher, indicating a solid price close to what we have expected. However, the BEF is currently at a rate of 1 G = 0.013 BEF. This is an astonishing 17,72% lower to what we expected.

My conclusions

We have seen that the NLG is somewhat better than we can expect, based on the product prices on the market. Combined with the quite stable rate over the last period, we can say that the NLG has the trust of the NLG holders: they are willing to pay for what it’s worth. This trust could very well be caused by the government’s intentions to keep a stable NLG at a rate of approx. 0.015 or 0.016. Although we cannot prove this with this research, we can compare it to a country that has almost no state intervention due what seems to be a bad political climate: Belgium.

The BEF rate has been quite unstable over the last period. This is not surprising, as the Belgium market is relatively new (again), and thus “searching” for a stable price. However, it is surprising that the BEF not only dropped to and below the expected rate, but that it is worth more that 17% less than what we expected! This shows total lack of confidence in the BEF, and something that the Belgium government should start to focus on as soon as possible. After all, without a stable currency, there will never be a stable economy.