Compendium: Exchange Rates and the Impossible Trinity

Every Currency has an Exchange Rate that determines its Value when compared against the Value of another Currency. This is best demonstrated by the Price of conversions between one Currency to another. If one wishes to know how much their Geld (Money) is worth in another Currency, begin by determining the Exchange Rate. That equation is:

Exchange Rate=(Starting Amount (Currency A))/(Total Amount (Currency B))

And if one knows the Exchange Rate and the amount of Geld that they have, but wish to know the final amount in the other Currency, the equation reads as:

Total Amount (Currency B)=Starting Amount (Currency A)*Exchange Rate

The Work-Standard still operates according to those same parameters. The real differences only begin in regards to the monetary policies that govern Exchange Rates.

The death of Bretton Woods did not just give birth to the Debt Standard and the trillions of US Dollars of Schuld (Debt/Guilt) plaguing whole economies. In addition to the question of Command and Market Economies within the economic realm, there is also the question of choosing between “Fixed Exchange Rates” and “Floating Exchange Rates” within the finance realm. As this following diagram demonstrates:

The difference between “Fixed Exchange Rates” and “Floating Exchange Rates” is far more than a political question of whether the State determines the exchange rate under the Intents of Command and Obedience or the Incentives of Supply and Demand. Insofar as the Work-Standard is concerned, there is the financial question of tackling the “Impossible Trinity.”

The Impossible Trinity refers to the ongoing dilemma within Exchange Rates where Currencies must balance between Sovereignty, Stability, and Mobility. In its simplest form, the Impossible Trinity insists that a Currency can emphasis two of the three attributes at the cost of sacrificing the advantages of the third attribute.

“Sovereignty” is whether the nation-state issuing the Currency is able to set the Exchange Rates on their own terms. Either the Value of the Currency is determined by its issuing nation-state or it is influenced by another Currency or else by another sovereign body like the European Union in the case of the Euro.  

“Stability” is whether the Currency in question can maintain its Value without too many deviations within the realm of Currency Depreciation/Appreciation. Either the Value of the Currency is considered operating on a Fixed Rate or else on a Floating Rate.

“Mobility” is whether the Currency is allowed to move freely across international borders without any controls and taxes. Either the Currency is allowed to circulate across international borders freely without regard for Currency Depreciation/Appreciation or else there are controls in place to prevent any large fluctuations in its Value as in the case of the Chinese Renminbi.

Below is a diagram of the Impossible Trinity and how its attributes interact with the dialectics of Fixed and Floating Exchange Rates. Note that the levels to the left of “Fixed Exchange Rate” are applicable for Currencies that rely on other Currencies or else are issued by supranational bodies like the EU:

When a Currency does exhibit characteristics of all three, the result is a financial crisis associated with the Currency in question.  The Mexican Peso Crisis of 1994-1995, Asian Financial Crisis of 1997-1998, and the Argentinean Financial Collapse of 2001-2002 are historical examples and each one demonstrating the consequences of applying all three.

Before any serious critique of the Impossible Trinity can be made from the purview of the Work-Standard, an investigation into its technical origins is needed. In essence, the Impossible Trinity finds its basis at the height of Bretton Woods during the 1960s vis-à-vis the “Investment/Savings-Liquidity Preference/Money Supply-Balance of Payments Model” (IS-LM Model), otherwise known best as the “Mundell-Fleming Model.” Economists Robert Mundell and Marcus Fleming devised the model by building upon the IS-LM Model to apply for Liberal Capitalist Market and Mixed Economies. The IS-LM Model that the Mundell-Fleming Model is based on John R. Hicks’ 1937 economics journal article ““Mr. Keynes and the Classics: A Suggested Interpretation,” which found its basis in John Maynard Keynes’ General Theory. Understanding the Mundell-Fleming Model entails also understanding the IS-LM Model.

The Investment-Saving Curve of the IS-LM Model refers to the Supply and Demand for the production of goods and services. Its equation reads as:

Production (Y) = Consumption * Production — Taxes [C(Y-T) ] + Investments (I) + Government Spending (G)

The LM curve refers to the Supply and Demand for Kapital according to the Interest Rate and the Output of Kapital. Its equation is:

(Money Supply (M)) / (Price Level (P)) = Money Demand (Interest, Production)

The Mundell-Fleming Model builds upon the IS-LM Model by including the “Net Exports” of goods and services and their “Price Level” in another Currency. Its best for understanding Liberal Capitalist Market and Mixed Economies, but not suitable for understanding Socialistic Planned and Command Economies. Moreover, both Models are impractical for use with the Work-Standard due to relying on financial and economic paradigms more attuned to the conditions of Socialism.

Given the three attributes of the Impossible Trinity and the two Models that given them their political legitimacy, it is conclusive to argue that the Work-Standard operates differently within the parameters of Fixed and Floating Exchange Rates. The reasoning for this is tied to the fact that the Value of a Currency pegged to the Work-Standard is guaranteed to a Fixed Exchange Rate backed by the Arbeit of the Planned or Command Economy. Additionally, the Work-Standard requires a Currency’s issuing nation-state to wield the national sovereignty necessary in setting the Exchange Rates. This in turn leaves the question of the movement of said Currency across international borders.  

The question of whether to impose controls on the movement of Currencies across international borders is a technological one inasmuch as it is also financial and political. The Work-Standard provides justifications for imposing controls on monetary flows and deterring them, offering greater flexibility in terms of monetary flows for the State. This means that the State will always be the final authority in deciding the rate at which its Currency enters and leaves other countries. It would entail greater synchronicity in controlling the flow of Geld and Arbeit and by extension the concurring movement of goods and services. Put another way, overcoming the Impossible Trinity is akin to advocating for alternatives to the “Free Trade Agreement” (FTA) and the rules of international trade since Bretton Woods.



Categories: Compendium, Economic History

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  1. Compendium: Devaluation and Revaluation (Pt. II of II) – The Fourth Estate

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