Are foreign currencies a way to make more money by exchanging dollars for a more stable currency? For example, if one dollar equals one euro, but the euro sees no inflation, whereas the dollar sees 5% inflation, could I put my life savings into euros to come out with a 5% increase in my dollars. Also, wouldn't these rates mean that I could pick any two currencies and make money by either borrowing or lending one of the currencies (as in exchanging one currency for another, not getting a loan with interest) and make money by making the right decision unless the two currencies had the same rate of inflation?
If you consider the actual goods able to be purchased, wouldn’t that offset the gains you would make by transferring your money from one currency to the other?
Absolutely. To tie in with your point, I'll set the stage: 8 months ago, the Japanese economy was (and kinda still is) struggling. They lowered the cost of borrowing (interest rates) to nearly 0 to increase the demand to borrow and stimulate their economy a bit. To combat inflation in America, we raised interest rates to around 5%. For the sake of the argument you are crazy rich and have assets to cover borrowing 1 billion yen (right now that's 6.77 million USD) that has 1% APY. You convert that yen to USD and then put it into American stocks or bonds, basically anything that would guaranteed go up while you hold the loan. If your return on investment every year is, say, 8%, while the rate to borrow yen is 1%, you essentially just made a profit of 480,000 USD factoring in the interest. It might seem difficult, but it's just that four step process and we're in the green. Woohoo! we are in the profit for absolutely no downsides**********!!!!!
********** THE DOWNSIDES: the rate to borrow goes up (uh oh now it costs more to borrow), the currency exchange rate from yen to dollar goes down (uh oh, when you convert your money back to yen, it costs more dollars to do that), or, if the thigs that are supposed to go up collapses (Uh oh, Trump just tariffed the crap out of everybody and stocks decided to jump off a cliff).
So in the example, if the rate to exchange yen decreases from 160 per USD to 140, the 400k profit you had turns into a nice 250k loss. And that just ONE thing that can go wrong.
Also, Gavin makes a good point, if all the prices of goods also go up 5%, then nothing is achieved, so there's that. Also, why not put your money into euro-bonds and make a profit that way, albeit very small.
********** THE DOWNSIDES: the rate to borrow goes up (uh oh now it costs more to borrow), the currency exchange rate from yen to dollar goes down (uh oh, when you convert your money back to yen, it costs more dollars to do that), or, if the thigs that are supposed to go up collapses (Uh oh, Trump just tariffed the crap out of everybody and stocks decided to jump off a cliff).
So in the example, if the rate to exchange yen decreases from 160 per USD to 140, the 400k profit you had turns into a nice 250k loss. And that just ONE thing that can go wrong.
Also, Gavin makes a good point, if all the prices of goods also go up 5%, then nothing is achieved, so there's that. Also, why not put your money into euro-bonds and make a profit that way, albeit very small.
You guys pointed out arbitrage opportunities in the forex markets, and illustrated the downsides. I should point out that arbitrage serves a market purpose - that arbitrage profit margin closing in to 0 isn't just (itsfreerealestate.gif) going away, but the market for these currencies reaching the equilibrium exchange rate.