My thought here is that if the dollar were to depreciate, then the value of US liabilities would decrease while the value of their assets would increase. Moreover, the US trade balance would become less negative in that their debts would be "cheaper." Is this intuition on the right track?
4
-
$\begingroup$ Value measured in what? USD? $\endgroup$– GiskardSep 23, 2021 at 5:33
-
$\begingroup$ @Giskard Yes, USD $\endgroup$– JamesSep 23, 2021 at 7:32
-
$\begingroup$ What are the assets and liabilities denominated in? USD or foreign currencies? $\endgroup$– user253751Sep 23, 2021 at 11:23
-
$\begingroup$ What kinds of assets and liabilities? $\endgroup$– user253751Sep 23, 2021 at 11:29
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
If a dollar depreciates then:
- Financial assets and liabilities (loans, bonds) denominated in US dollars are still worth the same number of US dollars.
- Financial assets and liabilities (loans, bonds) denominated in foreign currencies are both worth more US dollars (because it costs more US dollars to get a foreign dollar).
- Tangible assets (e.g. real estate) are worth more US dollars because each dollar is worth less "real stuff".
- Tangible liabilities (e.g. an obligation to produce widgets) are worth more US dollars because it will cost more US dollars because each US dollar is worth less.
Essentially, if a currency depreciates, it means everything goes up when measured in that currency... except for contracts that refer to a specific amount of currency (like bonds). The foreign real estate is still worth one piece of foreign real estate, but now one piece of foreign real estate equals more dollars.
answered Sep 23, 2021 at 11:32