Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Soft currency is your own currency (where "you" are the government of the country in question). Hard currency is everyone else's currency.

You need hard currency to buy stuff other people make, unless they want to give you their stuff for free, as China wants for the US (well, not really for free, since the quid-pro-quo is that China gets the US' capital plant in return).

The neoclassicals treat all currency as being commodities. So when your currency is dropping like a rock, they advise you to destroy some of it, and not print as much of it.

The problem with that advice is that people don't buy your currency because it's shiny. People buy your currency because it lets them buy your stuff. Which means that the reason your currency is losing value is either that you have higher inflation than your trading partners or that you are unable to meet your hard currency obligations.

In the former case, trying to defend the exchange rate is stupid - it will make your companies move to other countries. Eventually you will become unable to defend your exchange rate because you've lost your industries, and then you'll have neither the strong currency nor your industries.

In the latter case, you cannot defend your currency by rationing it. If you have less hard currency than you owe, Mr. Soros and his friends can always squeeze you. Now, there are two possible reasons why you might find yourself in that sort of bind. The first is that you took leave of your senses and borrowed hard currency in order to gamble with it. Like Ireland.

The second possibility is that your economy went tits-up, and that crashed your ability to make stuff to sell to foreigners for hard currency. In that case, you want, seemingly paradoxically, to print more money, because getting your economy running again is the only chance you have of producing enough stuff to cover your hard currency obligations.

Can a currency be both hard and soft? Yes and no. In principle it can't. In practise, the way the BuBa treats the €-Mark is making a pretty convincing case that it can be. In fact, the whole "independent central bank" scam is all about making your soft currency behave like hard currency. Which is stupid, of course. But makes a lot of sense if you are operating in a mental model where all currency behaves as hard currency by assumption.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:25:11 PM EST
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