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In the 1980's the punt had lost a lot of value relative to Sterling based not on trade or competitiveness issues, but because the rating's agencies etc. decided that a small currency always constitutes a greater risk of volatility and were generally dismissive of such a small economy/currency.

Yes, in a floating currency regime the currency of the weaker and less powerful country will generally trade at a discount.

Yes, this is unfortunate for the weaker and less powerful country, and represents a tribute payment to the more powerful.

No, you do not avoid paying this tribute by attempting to maintain a hard currency peg. You just force the more powerful countries to break your peg and loot your strategic hard currency reserves to collect it. That leaves you still paying the tribute, but with greater collateral damage.

From a consumer point of view my newly acquired mortgage was at 14% interest and inflation was similarly high.

This is a domestic political matter that has only tenuous connection to the exchange rate regime.

Yes, you can use a currency peg (and accompanying threat of chaos if it is abandoned) to cut through the internal political discussions of your domestic democracy. The cost of that is that you cut through the internal political discussions of your domestic democracy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 24th, 2013 at 09:21:45 AM EST
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