Hidden Cost of Devaluation

Day 1,256, 12:52 • Published in Ireland Ireland • by Sweet Drinker

Innate Currency Volatility

Globally currency values have fallen over the last few months against gold.

Presumably managers are able to deal with this issue by adjusting wages/prices accordingly. If your cash is worth half as much, but you pay your employees twice as much and charge twice as much for your products the net result is the same... right?

Basically this is true. However there is a hidden cumulative complication in the loss of currency/gold basis points.

The following is a simple table of gold exchange rates. The minimum price of gold at those exchange rates. And the percentage of value fluctuation possible at each basis point of exchange.

*Fluctuation potential is the range of price currency can be converted back into gold at. A currency cannot move outside of this range unless the gold exchange rate moves accordingly.

Exchange Rate______Min Cash Value_____Fluctuation Potential
0.015________________66.66667___________6.25%
0.014________________71.42857___________6.66%
0.013________________76.92308___________7.14%
0.012________________83.33333___________7.69%
0.011________________90.90909___________8.33%
0.010_______________100.________________9.09%
0.009_______________111.1111___________10%
0.008_______________125._______________11.11%
0.007_______________142.8571___________12.5%
0.006_______________166.6667___________14.28%
0.005_______________200._______________16.66%
0.004_______________250._______________20%
0.003_______________333.3333___________25%

Clearly, as the gold basis point drops, the potential for volatility in gold prices increases. And this problem compounds the lower the basis point drops. Dropping from 0.015 to 0.014 increases volatility by less than 1/2%, while falling from 0.004 to 0.003 increases cash volatility by 5%.

I've highlighted 0.005 on the chart for two reasons.

First: This exchange rate is becoming prevalent throughout the world economy. At this exchange rate company owners must deal with a potential variance of 16.66% in cash value, which translates directly into the value of their products. This degree in fluctuation can easily make the difference between a profit or loss.


Don't give up mate

Second: 0.005 is the print rate a nation creates it's currency at. With the conversion of important game mechanics from gold to cash purchases (like MPP's), currency is far more useful to governments now than previously.


It's all about profit!

A savvy treasurer might take note of the fact that if his state's currency has dropped to 0.004 or lower, he can buy it all up off the MM at a profit to his state. Likewise if the price of gold drifts too far above 200cash/1gold (0.005), he can place the state's cash on the MM to prevent major discrepancy or fluctuation in their cash value. Protecting businessman's hairlines while earning the state some 'interest' on the state's capital.

Ofc, some of us don't mind all this fluctuation in the currency markets. It provides so much opportunity to speculate on your goods/currency markets for profit!