What if Ecuador used a monetary currency that was tied to a powerful nation that was taken over by fascists?
Given recent events in the world, I was curious about how Ecuador could be affected by dramatic events in the United States, especially since Ecuador's monetary currency is the U.S. dollar. So I asked my friend Chat about it. Chat knows a lot about international finance and geopolitics. Here is our interview. Q: Hi, can you help me think through a hypothetical situation?
A: Of course! What's the hypothetical situation?
Q: Suppose there was a parallel universe with its parallel version of planet earth. There was a powerful nation, like the United States, let's call it Ameristan, and let's call their currency the Dollar. There was a little country in Latin America like Ecuador, let's call it AndesNation, which uses the Dollar for it's currency.
What happens if Ameristan is taken over by a fascist regime that deports 12 million Latinos (causing massive pain and suffering to millions of families) and there's no longer a sufficient labor force for economic sectors like agriculture and home construction. In addition, Ameristan puts a 50% tariff on imported goods which causes prices in Ameristan to skyrocket which causes massive poverty there. What happens to the people of AndesNation? Does their economy also crash?
A: That’s a fascinating thought experiment, and it touches on some complex economic and social dynamics! Here’s how the situation might unfold for AndesNation under these conditions:
1. Currency Depreciation and Inflation in AndesNation:
Because AndesNation uses the Dollar, its economy is directly tied to Ameristan’s economic stability. If Ameristan's economy takes a hit, the Dollar could lose value or suffer from high inflation. This would have a direct impact on AndesNation, as people’s savings and purchasing power would effectively shrink, creating economic instability.
Since AndesNation doesn't have control over its own currency, it would struggle to stabilize its economy independently. Import prices could soar, worsening poverty and increasing costs of living.
2. Trade Impact from Ameristan’s Protectionism:
The 50% tariff could collapse much of Ameristan’s international trade. If AndesNation exports to Ameristan, especially agricultural products or natural resources, its industries could suffer major losses. Reduced demand from Ameristan could mean layoffs and reduced GDP growth, causing poverty and unemployment in AndesNation.
On the other hand, if Ameristan ceases exports or severely restricts imports, this could cause shortages in AndesNation for goods typically sourced from Ameristan (e.g., technology, medicine, machinery), pushing prices higher and impacting overall living standards.
3. Disruption to Remittances:
If a large number of Latinos are deported from Ameristan, AndesNation would likely lose a crucial stream of remittances from its citizens living abroad. Many families in AndesNation may rely on these funds for basic needs and expenses. The sudden loss of this income would leave many families vulnerable, potentially sparking a severe economic crisis and increase in poverty.
4. Labor and Economic Gaps:
In AndesNation, the mass return of people deported from Ameristan would bring both challenges and opportunities. A significant influx of people could strain resources, housing, and job markets, increasing competition and potentially driving wages down in lower-skilled jobs.
On the flip side, if those returning have new skills or experience, they could bring value to sectors like construction or small business growth in AndesNation, though integrating this workforce could be challenging.
5. Social Unrest and Political Consequences:
Economic hardship combined with a surge in returning migrants could create tensions within AndesNation. Increased unemployment, strained public resources, and rising prices may lead to social unrest and put pressure on the government to act.
Politically, AndesNation might need to rethink its reliance on the Dollar and explore ways to diversify its economy, perhaps by strengthening ties with other trading partners or considering monetary policies like creating its own currency or seeking regional cooperation for economic stability.
In summary, under this scenario, AndesNation’s economy would likely suffer significantly from shocks in trade, remittances, and currency instability, potentially resulting in recession and social upheaval.
Q: What if AndesNation switched its currency to the parallel of China, let's call it ChinaLand?
A: Switching to the currency of ChinaLand would be a bold move for AndesNation, but it could have interesting effects, both positive and challenging. Here’s how it might play out:
1. Reduced Dependency on Ameristan's Economy:
By adopting ChinaLand’s currency (let’s call it the Yuan), AndesNation would no longer be directly tied to Ameristan’s Dollar, which might offer a buffer against the economic turmoil Ameristan is experiencing.
With the Yuan, AndesNation could benefit from a currency that is less volatile due to Ameristan's crisis, reducing the risk of imported inflation and allowing AndesNation more stability in trade with other countries.
2. Closer Economic Ties with ChinaLand:
Using the Yuan could make AndesNation a more attractive partner for ChinaLand, potentially leading to more favorable trade agreements, investments, and loans. ChinaLand might invest in AndesNation’s infrastructure, industry, or technology, helping to boost economic growth and diversify away from reliance on Ameristan.
Trade patterns might shift, with AndesNation increasing imports from ChinaLand and other Asian or regional partners. This could benefit AndesNation’s economy by reducing costs on essential goods and machinery, offsetting shortages caused by Ameristan’s tariffs.
3. Potential for Currency Stability and Monetary Flexibility:
ChinaLand might have a more stable currency during the Ameristan crisis, which could help AndesNation reduce inflationary pressures.
However, by relying on the Yuan, AndesNation would still lack control over its own currency. Any monetary policies or decisions made by ChinaLand could affect AndesNation, and it would still be vulnerable to external decisions beyond its control, though perhaps less so than with the Dollar.
4. Initial Transition Challenges:
Switching currencies can be a massive logistical challenge. AndesNation would need to establish agreements with ChinaLand for currency conversion and potentially re-denominate contracts, savings, and wages in Yuan. This could temporarily destabilize the economy as businesses and individuals adjust.
Public trust could also be an issue. Citizens might be wary of a sudden currency switch, especially if there’s concern that they could lose purchasing power or face difficulties with currency availability during the transition.
5. Impact on Remittances and International Perception:
Remittances from deported citizens or those still living abroad would complicate the situation. Many workers may still be paid in Dollars or other currencies, so AndesNation would need efficient exchange mechanisms to convert these funds to Yuan without excessive fees or delays.
The international community might view AndesNation’s currency switch as a strategic alignment with ChinaLand. This could make AndesNation more competitive in attracting investments from countries aligned with ChinaLand, but it could also draw skepticism from Ameristan and its allies.
6. Long-term Economic Implications:
Over time, AndesNation might be able to benefit from economic growth and stability, especially if closer ties with ChinaLand foster investment in industries like manufacturing, tech, or green energy.
If AndesNation also considers adopting a dual currency system, it might gain flexibility by allowing the Yuan alongside its own local currency for domestic transactions, easing the transition.
Summary
Switching to the Yuan could help shield AndesNation from the immediate fallout of Ameristan’s crisis, especially by fostering closer ties with ChinaLand and creating a more diversified trade and investment profile. However, the transition would bring challenges, especially logistical issues, public trust, and dependence on ChinaLand's economic policies. If managed well, though, this shift could be a stepping stone toward greater economic independence and resilience.
Q: Would it be better for AndesNation to switch to a different currency, for example that of the parallel to Europe?
A: Switching to the currency of Europe's parallel, let’s call it the Euro, could be a viable alternative for AndesNation and might even provide unique advantages compared to the Yuan. Here’s how switching to the Euro could impact AndesNation:
1. Enhanced Stability with a Major, Globally Accepted Currency:
The Euro is typically seen as one of the world’s more stable currencies. Tying AndesNation to it could provide long-term financial stability, as the Euro may be less volatile than the Dollar under the circumstances in Ameristan, and it could be more stable than the Yuan, which may still be subject to political controls by ChinaLand.
As a widely accepted currency, the Euro is less politically tied to any single country, so AndesNation would avoid some potential diplomatic or geopolitical concerns that might come with aligning closely with ChinaLand and the Yuan.
2. Attraction of European Investment and Trade Partnerships:
By adopting the Euro, AndesNation might open the door for more direct investment and trade from Europe. European companies may see AndesNation as a stable, attractive location for investment, and AndesNation could benefit from the expertise, technology, and business practices of European firms.
Trade with the European region could increase, and AndesNation might establish more balanced, diversified trade relationships, reducing its dependence on Ameristan while providing alternatives to products or services that Ameristan may now restrict.
3. Positive Perception and Public Trust:
The Euro carries a reputation for stability and prosperity, which could foster greater public trust and confidence during the currency transition. Citizens of AndesNation might view the Euro as a safer choice, especially given the Euro's association with strong economies.
In addition, because the Euro is a familiar currency worldwide, remittances from workers abroad might be easier to manage, especially if they are also coming from European countries or countries where currency exchanges are readily available.
4. Long-Term Access to Eurozone Markets:
Using the Euro could create opportunities for AndesNation to build long-term economic partnerships with the Eurozone, including possibly joining European-led trade agreements or economic initiatives.
Euro-using AndesNation would likely find it easier to align with the standards and regulations of European countries, which could make exports to these markets smoother and increase demand for AndesNation’s products or services.
5. Challenges of Dependency and Loss of Monetary Control:
Like with the Dollar or Yuan, AndesNation would lose control over its own monetary policy, leaving it vulnerable to changes in Eurozone policies. However, the European Central Bank’s (ECB) policies are generally transparent and stable, which may be a lesser concern compared to relying on Ameristan or ChinaLand.
If Eurozone countries face economic troubles or inflationary pressures, AndesNation could be negatively impacted, though the likelihood of severe Euro inflation might be less than with the Dollar in the current scenario.
6. Economic Diversification and Growth Potential:
Adopting the Euro could incentivize AndesNation to develop sectors that align with European markets, such as green energy, tourism, tech, and sustainable agriculture, fostering long-term economic growth and resilience.
If AndesNation also receives European funding or investment for infrastructure, education, or healthcare, it could enjoy social as well as economic benefits, making the Euro adoption a more holistic upgrade.
Summary
Switching to the Euro could provide AndesNation with stability, broader international credibility, and access to European markets and investment. While it would face the same challenges as any currency switch (dependency on foreign monetary policy and potential logistical hurdles), the Euro could be an appealing choice because of its widespread acceptance, economic reputation, and relative political neutrality. In the long run, the Euro might enable AndesNation to diversify its economy and reduce its dependency on Ameristan or ChinaLand, giving it more balanced economic security.
Q: But wouldn't the Euro also be affected by the instability in Ameristan? Isn't Europe's economy quite interconnected with Ameristan's?
A: Yes, you’re absolutely right! The Euro—and Europe’s economy as a whole—would likely be affected by instability in Ameristan, given the deep economic interconnections between Europe and Ameristan. Here’s how the situation might play out for AndesNation if it switches to the Euro under those conditions:
1. Indirect Economic Impact from Ameristan’s Crisis:
While Europe isn’t directly tied to the Dollar, its economy is highly interconnected with Ameristan through trade, financial markets, and multinational corporations. If Ameristan’s economy spirals due to tariffs, labor shortages, or inflation, Europe would feel the ripple effects, especially in sectors like finance, manufacturing, and consumer goods.
The Euro could face downward pressure if investors fear a prolonged economic slowdown in Europe due to declining Ameristan demand or global market instability. This means that AndesNation might not escape the effects of Ameristan’s crisis even by switching to the Euro, although it might still experience less volatility than if it were using the Dollar.
2. Potential Trade Disruptions:
If Ameristan imposes high tariffs on imports, European exports to Ameristan could decline sharply, hitting European economies that rely heavily on Ameristan’s market (e.g., Germany and France). This downturn could weaken European growth, which may affect the Euro’s value or lead to slower economic recovery in Europe.
Lower demand from Ameristan could also lead to cost-cutting measures by European firms, which might reduce European investments in AndesNation or limit new trade agreements, affecting AndesNation’s economic prospects.
3. Financial Market Volatility:
Financial markets are highly interconnected, and a major crisis in Ameristan could cause global market shocks, affecting the Euro and European banks. If European banks have exposure to Ameristan’s markets or companies, they might suffer from bad debts or financial strain, which could limit the availability of credit and investment funds for countries like AndesNation.
A depreciating Euro due to Europe’s own struggles could mean higher import costs for AndesNation, contributing to inflation and eroding purchasing power.
4. Long-Term Stability Still Favors the Euro Over the Dollar:
Despite Europe’s exposure to Ameristan, the Euro might still provide a better option than the Dollar if the crisis in Ameristan is severe. Since the European Central Bank (ECB) might take steps to stabilize the Euro and cushion Europe’s economy, AndesNation would benefit from a more stable policy response compared to the Dollar.
Europe’s economic diversity (with trading partners in Asia, Africa, and within Europe itself) could help absorb some of the shocks from Ameristan’s crisis. This could make the Euro a relatively resilient currency, even if it’s affected by Ameristan’s downturn.
5. Opportunities for Diversifying International Relationships:
By adopting the Euro, AndesNation could focus on strengthening relationships with not just Europe, but also European-aligned or neutral markets, seeking alternative trade routes and reducing dependence on Ameristan.
This shift could encourage AndesNation to diversify export markets and attract investments from countries that are less affected by Ameristan’s crisis, positioning AndesNation for longer-term resilience.
Summary
Switching to the Euro won’t fully insulate AndesNation from the fallout of an Ameristan crisis because Europe is economically tied to Ameristan. However, it may still offer more stability than the Dollar, as the Eurozone has resources to mitigate some of the impact. If AndesNation switches to the Euro and strategically diversifies its trade and investment partnerships, it could reduce its economic vulnerability and create a more resilient foundation in the face of global economic instability.
Q: Excellent, thanks so much for helping me with this hypothetical situation.
A: You're very welcome! I really enjoyed exploring this scenario with you—it was a great thought experiment with a lot of real-world relevance. If you have more hypothetical situations or any other questions, feel free to reach out. Happy to help anytime!