[FT] Issue #6 | Understanding Monetary Policy

Day 1,178, 10:15 • Published in Canada Canada • by AugustusV



Day 1,177 | February 10th, 2011
[FT] Issue #6 | Understanding Monetary Policy








In recent debates the issue arises over the value of CAD and it's influence on a nation's treasury and economy.

First it is important to note that although the value of a national currency has no medium or long term effects to the purchasing power of individuals, the value of a currency does indeed impact other factors of the economy and government revenue.

Although it may seem confusing, it is impossible to actually claim what value of currency is desirable in any situation as global economy and domestic economy shifts rapidly and the trends it creates can sometimes favor one policy or the other. With that being said, every trend does have a different ideal currency value.

The relationship between government income, trade, and monetary policy is closely linked.

So what will a lower or higher currency mean for a nation? Starting at the basics, a lower valued currency diminishes the returns that a treasury gains through taxes if wages and prices do not adjust to the new value of the CAD.

Due to the low globalization rate of eRepublik economies, prices and wages are often unlinked to the prices and wages of other nations. Although purchasing power is usually the same or close in most reasonably population countries, the actual values of wages and goods differ greatly due to the lack of trade.

If we look at the market today in eCanada, food is still selling for under 1 CAD and wages are at around 25 CAD for a level 10 skill. In the past months wages were actually higher than 25 CAD for the same skill which only adds further to the point.

However what has changed is that 1 gold used to sell for 30 CAD, and now it sells for 50, 60, 70, etc. Instability in the markets and government incompetence is another issue but for now let us stick to the original point.

Taxes for the government have been unchanged, what does this mean? That when the government collects 100 000 CAD a month in taxes, that 100 000 CAD is worth half as much in gold value as before. This means that waging wars, paying for treaties and any other activity that involves the government purchasing gold or foreign goods means that the government lost half of it's revenue.

If global economy were more intertwined, prices and wages would be in relation to gold values, meaning a drop in the CAD would ideally an almost equal rise in prices/wages.


Which brings us to the next point, how is trade affected by monetary policy?


When the CAD is valued lower, eCanadians and GMs alike can afford less gold. Arguably the majority of eCanadians and other citizens only buy from the domestic market, and the majority of foreign goods are bought by company owners looking for cheaper goods. With the loss of orgs, GMs are finding it harder to buy goods from other markets and indeed the newer GMs will be unable to buy them altogether unless they manage to frequently change their citizenship or buy in large quantities; neither of which is too popular.

This means that there is very little international trade in eRepublik thanks to the structure of the economic module.

However trade can also be done by export licenses, which of date, are becoming less popular due to the tariffs imposed by most of the large markets. This means that the last bastion of international trade is slowly being eroded away.

Usually a lower CAD and a lower gold value of goods resulted in more exports due to the fact that eCanadian company owners found it easier to compete with foreign companies due to the differences in gold value of goods.

This is why I once proposed a theoretical idea of reducing the CAD to the minimum amount, however that idea was conceived long ago, and it was not an original idea at all. Nevertheless the world economy has changed and the benefits of making your exports more competitive has since diminished.

This means that unless the global economy makes some serious changes, a lower CAD is at this point undesirable. In the past a lower CAD meant more exports, which meant a larger demand for eCanadian goods and thus currency, which resulted n the government compensating the loss of gold revenue by printing money.

Given that a government has to take it's weak currency, buy gold (which it can now afford less of), and print it to still make a profit off of an export economy is no longer viable, it is very safe to restate that a low currency is undesirable.


How does the value of the CAD affect the average citizen?


Simple, if you want to start a company, you need 10 gold, if you want to upgrade your company, you need more gold, and if you want to buy health packs, you need, again, more gold. The salary of today of roughly 25 CAD (for a skill 10) will draw however two times less gold than the salary of a few months ago, roughly also 25 CAD. The conclusion is self explanatory.


What caused our lower currency?


A combination of an influx of fake currency and government incompetence has resulted in lower currencies all over the world. It is now even harder for a government to churn a profit off printing money to compensate the growing demand of an export economy because the admins are over saturating the market with more printed money themselves.


Why would admins want a weak currency?


Arguably the admins saturated the market with currency for two reasons:

1. There was overproduction of goods and being unable to find a better productivity formula, the admins took the lazy way out, and created a bot to buy up goods and store (or delete) them. They used new currency and thus spread this currency all over the market.

2. The sneaky sneaky admins realized that a lower value of currency meant that gold was way more expensive, the result? Buying gold for them now becomes a much better deal, in relation to the Canadian economy, buying gold today gets you two times the same amount of CAD it once did. This is however, just my personal hypothesis.


The government should try to raise the value of the currency. The question is how?


The "how" can be done many different ways, some steps including the obvious one of ceasing all money printing activities, and buying up Canadian currency with government gold reserves. The problem is that this is not even remotely close enough to affect CAD in any meaningful. Government makes very little actual gold from taxes and cannot possibly counter the influx of CAD.

Solution 1

One solution I have been proposing is a better bond system, run by people who understand how to run such a system. The idea is that the government can stabilize the CAD using the gold capital owned by eCanadians. As citizens we make gold when we level up and make gold when we sell our CAD. Since exporting is so rare, making gold through selling foreign currency is becoming almost nonexistent.

It's true that possibly not even the collective gold wealth of bonds that a government can sell will be enough to raise CAD value back to where it once was, but it can stabilize prices and prevent the rampart speculation going on today.

Solution 2

Taxes. The collection of taxes means that the government can take CAD out of the market, which it can then spend or hold. This means that higher taxes result in more government control over the CAD. However the profitability of GMs and the ability for them to sustain this tax is another matter all on it's own and which will need lots of tedious research by the financial administration. What should be assumed when considering the viability of this plan, is that the tax increases could be sustained by GMs.

This is however, a topic with no easy conclusion: would it be better for the government to store up CAD and thus be unable to pay for the army as much as it likes to, or would it be better for us just to spend the extra income on the army and other social programs?

The answer can only be achieved if we look at another factor:

"Would the government raising the value of the CAD be better or worse for the citizens of eCanada?"

Depending on where your priorities lie, the answer is subjective to these opinions.


Conclusion


We understand now what the affects are of a lower/higher currency, we understand that we can choose to favor government revenue or personal prosperity,we understand why the admins possibly created this situation, and we understand some steps our government could take.

What must we do? In my opinion, I think we should try and raise the value of the CAD. How? Well for Solution 2 I do indeed favor a stronger army in times of conflict, but if we are able to negotiate peace, I think it would be better to help our currency and help our citizens earn more gold and be able to open more companies.

In regards to Solution 1, no one can argue against it. Government will stabilize CAD with the borrowed money of individuals, and a competent central banker could even do it in such a way that small profits are made in between to help pay for the interest rates on those bonds. The government can still spend away on it's army and it's citizens will be able to buy more gold if the program achieves the success. The only thing that lacks is ambition, courage, and competence.

If we are to win the future we must win our economy. The economy today is like a plane with it's engines cut off, and we cannot win the economy if we sit by and "let it go it's course".

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Octavian_F is the CEO of the Investment Bank CIBC, former eCanadian and eDanish congressmen, and Chief Editor of the Financial Times.