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Current time:0:00Total duration:7:49

Video transcript

philosophy visit 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 bees were wanted to be converted into currency a and because everyone is converting everyone is afraid to convert it to B now because they think for whatever reason that B the country bees 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 bees to trade for an a4 and a which is just another way to say B's currency B's value these value would go down and that could 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 and so what they do is they could use they could use reserves and I'll deuce in blue for country B so they could use reserves of a that they've accumulated during better times and they take those reserves so these are reserves that they accumulated in better times or in previous videos depending on 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 or so one way they're adding supply of A's and they're also adding subplot 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 it's not like they can print another countries currencies forever or they can't print it at all they oh 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 off in the case is currency speculators see this and they 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 is trying to keep it from 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 literally could go to a bank and country B and borrow I could borrow some of the B currency and then I could go into the exchange markets and try to convert it into a x' and try to convert it into a z' and just off of when looking at the superficially 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 it even hold bees before they're going to be borrowing bees and then converting them into A's so it's going to create an even larger supply of bees and even more demand for the finite number of A's that are willing to go this way and why as the speculator doing this well think about the two situations for them if for whatever reason let me write to draw the two scenarios so scenario one is is that for whatever reason the central bank of B is able to keep the currency stabilized so currency currency stays stays stable and the other scenario is is that the central bank runs out of reserves and they have to essentially just let the currencies float and B gets devalued so central bank central bank out of reserves out of reserves which would mean that the currencies would float the currencies would float and B would would devalue devalue well if this first scenario happens and it's become it's going to become more and it's going to become less and less likely as more and more people pile on the strategy and more and more people try to run out of bees or try to exit bees currency but even if this situation were to happen then the speculator says okay the currency ended up being stable I'll just unwind this I'll take my A's when I have to pay off my debt and B I'll take my A's convert them into B's and pay off my dad and so depending on what the interest rates and all of that were not a big loss or maybe even a minimal loss so minimal loss minimal loss and only if there's kind of a differential with interest rates or things like that minimal to no loss minimal to no loss but what happens if the central bank runs out of reserves and remember just the fact that these speculators are doing the speculative attack they're borrowing and country and converting into it the car they're borrowing in country B and converting to a that's making the central bank run out of reserves even faster it's going to deplete their reserves essentially when they do this it's the central bank of country B that's going to be giving them is going to be allowing them to convert they don't know who they're who they're buying these B's from with this a currency they have and so if this happens that the central bank runs out of reserves it floats and then B D values then those currency speculators make a pretty good buck and just to see how that could work imagine that they borrow a hundred B's they borrow a hundred B's so this is what they borrow they borrow a hundred B's and while the the currency is is is being actively intervened with by the central bank they're trying to keep it from devaluing the the exchange rate is one a for one B so they convert it they're able to convert - so they convert on the open market and the only reason why this is able to happen at this exchange rate is because B central bank is actively selling aids they're able to convert to 100 days 100 days now let's say that they are able to do this and the the central bank runs out of a's and then a devaluation occurs so this is happening this is happening at a conversion of 1 a equals 1 B but let's say that these guys they run out of reserves so things devalue B becomes worth a lot less and then we go to a future state where 1a is now equal to 2 B's well as soon as this happens remember this this scenario right over here that we're thinking about right over here this is what the currency speculators want to happen if one day all of a sudden is it's two B's because the central bank can't intervene anymore they are floating the cart B gets devalued then what's going to happen these guys can take their hundred days convert it back once the once things are floating so now they're going to convert back into this direction and how many B's can they convert it into well now they can convert it into 200 B's they can convert it into 200 B's they can pay off their debt because they borrowed the 100 B's so minus 100 B's to pay debt to pay debt and then they make a pretty sighs sizable profit they make a profit of 100 B's and so that's exactly what they're hoping for and so you can imagine this is one of those trades that they're going to try to get more and more people to do because the more people that jump on the bandwagon and do this exact same strategy the faster the central bank's reserves are going to plead and the more likely the more likely that this situation this situation right over here plays out