Currency reserves
Speculative Attack on a Currency
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- So let's revisit the scenario where everyone is trying to
- exit Country B's currency, and convert it back into Country A.
- We saw in the last video that if just left to its own devices, if this were to happen,
- if a lot of B's were wanted to be converted into Currency A,
- and because everyone is converting- everyone is afraid to convert into B now,
- because they think for whatever reason that B, Country B is in bad shape,
- then you have this imbalance and if you left to its own devices,
- the Country B's currency would become devalued.
- you would need more, more B's to trade for an A.
- (For an A.)
- which is just another way to say B's currency, B's value,
- would go down. And that would be a bad thing, especially if it's a pretty steep decline.
- Maybe it's a country that needs to import fuel from the rest of the world,
- Maybe they need to import food from the rest of the world,
- and if their currency were to devalue dramatically,
- then imports could become very, very, very expensive.
- And so people in that country might have to pay double for gas,
- and double for basic necessities, like food and whatever else.
- And so we played out a scenario where the central bank of Country B
- actively tries to intervene to keep this from happening, to keep the exchange rate
- stable.
- So what they do is, they could use, (they could use), reserves
- (and I'll do some blue for Country B,)
- so they could use reserves for- of A,
- that they have accumulated during better times,
- And they take those reserves,
- so these are reserves that they accumulated in better times,
- or in previous videos, depending how you want to view them,
- and they try to balance out the supply with A's with the supply of B's
- by selling, (by selling), their reserves and buying B's.
- So one way to think of it they're adding supply of A's,
- and they're also adding supply- they're also adding demand for B's.
- They're going to sell the reserves of A,
- and buy their own currency. And that would work,
- as long as they have reserves, they're going to be able to
- stabilize things, so that this situation doesn't happen.
- But the problem was, and we talked about at the end of the last video,
- is that they can run out here. It's not like they can print
- another country's currencies forever.
- Or they can't print it at all; they had to accumulate this.
- This isn't their own currency, so they have a
- finite amount of this, they could eventually run out.
- And what is often the case is,
- currency speculators see this and begin to smell blood.
- They see, "Okay, look, people are trying to exit this currency,
- it would devalue if it was left to its own devices,
- but the central bank of Country B is trying to keep it devaluing
- by depleting its finite reserves of currency A.
- And so what currency speculators will start to do is,
- "Well, I can go into Country B, and I can borrow B's,
- (so I could literally go to a bank in country B and borrow, I could borrow some of the B currency),
- and then I can go into the exchange markets, and try to convert it into A's."
- (and try to convert it into A's.)
- And just off of when looking at this superficially,
- what- what's that going to do?
- Well, this is going to make the situation even worse for the central bank.
- Because now you have people actively,
- that even hold B's before they're going to be borrowing B's,
- and converting them into A's.
- So it's going to create an even larger supply of B's,
- and even more demand for the finite number of A's that are willing to go this way.
- And why is the speculator doing this?
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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