[p2p-research] Relative Price Levels in the Euro Area 1995-2009

[Ryan Lanham]

All good questions.  I'll try to answer best I can:

On Wed, Jun 30, 2010 at 12:34 PM, Patrick Anderson <agnucius at gmail.com>wrote:

> Ryan Lanham wrote:
> > But if national governments operate independently,
> > it is hard for currency unions to be fair.
>
> > That is why, throughout history, currency unions
> > and voluntary systems have almost universally failed.
>
> Does this mean all of the 'alternative' and/or 'community' currencies
> will have a problem being 'fair' without an intermediary or some sort
> of central arbitrar?
>

It means that any currency that purports to have value for public and
private debts in a given jurisdiction must have a central authority that
determines the standards of money.  It is illegal in most jurisdictions to
compete with said money.  Private currencies are problematic legally in a
number of ways.  Typically, they are viewed more as coupons or exchange
tokens (like a subway token) rather than "money."  Money has very specific
legal meanings.


>
> If so, why would an issuer choose to be 'fair' when
> they can otherwise take advantage of their position?
>
>
Most don't choose to be fair.  The US has a long history of operating its
currency to the benefit of a broader domain than US citizens, but of late,
many quite rightly question whether that continues.  Sterling held a similar
role before the dollar...and sometime concurrent with it.  My guess is that
the Yuan is headed there.  The Euro was meant to, but never quite reached
that level of prestige or universality.


> Why is this not solved through currency "exchange rates",
> and how (or by whom) are those set?
>
>

It does actually.  But if countries agree to fix their exchange rates (i.e.
have one currency) it doesn't work.  The Euro zone is one currency from
Ireland to Finland to Greece.  Germany is the de facto driver of the Euro
and hence it is sometimes called the Euromark or some such bastardization.

The "market" which is a currency trading market between banks sets the
rates.  Governments attempt to manipulate them through fiscal and monetary
policies.  The currency market is the most vast on earth...by a long shot.
In the end, it is supply and demand that determines how much a bottle of
Scottish whisky costs in Yen, dollars, Euros or pounds sterling.  The rates
move with surprising power and frequency.  Movement of about 1% of the value
of the Euro versus the dollar per day is not at all unusual.  In global
financial terms, the implications are huge.  Greek inability to pay a bond
that financed a wage to a civil servant can easily cause a hunk of chinese
steel or Peruvian copper or a dram of Scottish Whisky to be more expensive
in Germany...in a significant way.


>
> Thanks,
> Patrick
>
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-- 
Ryan Lanham
rlanham1963 at gmail.com
Facebook: Ryan_Lanham
P.O. Box 633
Grand Cayman, KY1-1303
Cayman Islands
(345) 916-1712
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