What is the devaluation and how does it differ from inflation?

In the sphere of finance, a lot of terms are used, many of which are unknown for most people. The news can often be heard, such a word as devaluation, which has to do with the national currency.

What is the devaluation?

The process that leads to a depreciation of the national currency against the currencies of foreign countries is called devaluation. For a better understanding of what devaluation means, let's give an example: the current ruble exchange rate against the dollar is $ 1 = $ 60, and when the decline in Russia occurs, the ratio will change and not in favor of the ruble, for example, $ 1 = 65 r. It is clear that the devaluation, this depreciation of money, that is, for the same amount of the national currency can be bought less foreign.

Reasons for devaluation

In most cases, the depreciation process is the result of macroeconomic changes. Devaluation of currency may arise as a result of:

1. Increase imports compared to exports, which causes the country's trade imbalance.
2. Reducing the purchasing power of the population due to a decrease in lending to banks. This can happen because of mistrust of financial institutions or a decrease in the level of wages.
3. The jump in the level of inflation.
4. Finding out what devaluation is, one more reason should be given - in case of falling imports, the foreign currency grows in order to compensate for the filling of the treasury, since the country's budget was calculated for other prices.
5. Unstable economic situation leads to the fact that many people are trying to bring the kapal from the country in the form of currency.

How is the devaluation going on?

The economic term is used to indicate the situation when the national currency falls in comparison with the rate of stable world currencies: the dollar or the euro. The concept of devaluation can still be considered as one of the options for national banks to manage the currency. In most cases, this phenomenon is manageable. Finding out what devaluation is, it is worth saying that in countries where the currency is "floating", such a process occurs automatically and regularly.

Types of devaluation

In the financial sphere, two main types of this phenomenon are used: hidden and open. They will be discussed below, but for now we will pay attention to such a notion as fiscal devaluation. This term is used to describe tax reforms aimed at stimulating the same effects that are obtained when the devaluation of the national currency occurs. If we consider the general picture of the situation, we mean a reduction in taxes that affect the cost of production, by raising taxes on final consumption.

Hidden devaluation

This species is used to characterize the fall of the course without any comments from the government. As a result, prices rise, but there is no withdrawal of "extra" money from turnover. A hidden fall in the rate can last for a long time. The term hidden-rate devaluation is used when it is necessary to reduce the impact of the national currency rate on the economy. If the reforms are not carried out correctly, the risk of a currency crisis is significantly increased.

Open devaluation

When using this kind of state agencies make an official statement. The central bank plans to change the course, and such information is open. The policy of devaluation of this type implies the withdrawal of "extra" money, which reduces the prices of goods and services. If the depreciated currency is replaced by a new one, then prices rise. This process does not last long, and is only a few hours. The advantages of this option include increasing the competitiveness of exports, and to the minuses - the decline in purchasing power, investment volumes and other related processes.

Devaluation and denomination - the difference

In fact, the presented terms are similar only to names. In order to understand the difference between devaluation and denomination, it is necessary to know the meaning of the second concept, since the former was already mentioned earlier. If we speak in an accessible language, then the denomination is a replacement of old currency with new ones with a lower denomination. Such a process can last from a few weeks to years. Thanks to the denomination, it is possible to strengthen the national currency, improve the settlement system and increase the demand for goods and services.

Devaluation and inflation - the difference

Such terms, in terms of their economic meaning, have many common features, since in both cases the purchasing power of the population falls. Reflecting on the fact that devaluation differs from inflation, it is worth mentioning that in the first case, solvency falls in comparison with the currencies of other countries, and in the second - with respect to itself in the domestic market. Another difference is that inflation is almost impossible to control.

What is the danger of devaluation?

The process of the depreciation of the national currency may have both good and bad consequences. First, let's look at what the devaluation leads to from a positive point of view:

1. There is a growing demand for domestically produced goods.
2. The consumption of the country's gold and foreign exchange reserves is decreasing.
3. Since the exporter conducts currency exchange at a favorable rate for him, then there is a stimulation of exports.

To better understand this topic, it is important to consider the negative consequences of devaluation:

1. In the domestic market there is an increase in prices.
2. Goods produced domestically are becoming more accessible.
3. Citizens lose confidence in the national currency, which has depreciated.
4. As import prices increase, imports are limited.
5. There are serious problems at enterprises whose work is related to foreign raw materials and goods.
6. Discussing the topic - what is the devaluation, it is important to mention one more negative point - there is a devaluation of deposits in the national currency.
7. Wages and pensions are decreasing, which negatively affects the buying activity.

How will devaluation affect loans?

When there is a falling rate, people who have loans in foreign currency suffer. Devaluation and credit in the bank are two interrelated things, because with the depreciation of the rate of inflation, which leads to higher prices for goods and loans, including. It is important to note that the price of loans rises faster than the ruble depreciates. Equally difficult situation is with mortgage loans, as the price of real estate is changing. After the situation stabilizes, the credit conditions become tougher.

What to do with devaluation?

In such situations, panic often occurs, leading to people making mistakes that worsen their financial status. There was a devaluation, what to do with deposits, where to store money and other tips:

1. Do not buy the currency when it starts to grow rapidly. An exception may be situations where a person plans to keep it for a long time. Financiers, other than the euro and dollars, recommend choosing the national currencies of China, Switzerland, Norway, Japan and Sweden, as these countries have a stable economy. It is best to keep money in several currencies.
2. It is recommended to have a "money pillow", which is designed for difficult times.
3. If possible, repay all loans, and it is not recommended to borrow new loans. If there are foreign currency loans, you should try to do everything to restructure them in rubles.
4. Prices for household appliances are growing rapidly, so it makes no sense to invest money in its purchase.
5. Understanding what is a devaluation, it is worth mentioning that in the situation of falling currency, the state will save big banks by refinancing, so you can choose one of the most stable financial organizations and place there a long-term deposit with maximum profitability.
6. To successfully invest in the period of the fall of the course, it is necessary to properly form a portfolio and have a reliable strategy, otherwise you can lose money.
7. If a person has money that will not be needed for a long time, then you can invest them in precious metals .
8. One of the most important tips is not to panic and soberly assess the situation. Do not trust the information you hear, but always double-check it. Psychologists advise in such periods to watch less news and not to arrange polemics with others.

How to make money on devaluation?

In difficult times for the country you can not only save your savings , but even earn. The main thing is to know who benefits from the devaluation, and where to invest properly.

1. Signing of long-term contracts with a fixed value of goods and services. Prices should be indicated in currency or tied to the ruble exchange rate at the time of signing the securities. If the company acts as a buyer, then it is profitable to conclude transactions in rubles.
2. Crisis periods in the economy are successful for the organization of a new business. It is important to choose the right direction, to think and count everything.
3. For people who have their own production, the next variant of possible earnings is suitable: the release of new products that can compete with imports. Experts recommend paying attention to the segments of the market, of which the foreign business has gone, but at the same time the demand has remained.
4. Opinions about the acquisition of real estate at such a time the experts are different. If you turned up a profitable option, then miss this opportunity - it's silly. It is unreasonable to purchase commercial real estate.
5. If a person has free money, then it is worth thinking about buying a currency. It is recommended to keep currency proceeds on foreign currency accounts.
6. In the period of the depreciation of the national currency, one should look at the shares, as the stock market falls. Researchers report that oil experts and metallurgical companies have good prospects, since they have a profit in currency, and it grows in price.