Wednesday, October 30, 2013

$US Shortage in T&T A Function of Central Bank Market Manipulation

The fact that it is becoming increasingly difficult to get $US is an obvious sign that there is a shortage of available $US.  This is a clear market signal that the price for $US in $TT (the exchange rate) is too low and that there is depreciating pressure on the $TT.

A disparity therefore exists between the $US quantity demanded and the quantity supplied, consequently a shortage occurs. The current price ceiling stipulated by the Central Bank is the reason for the shortage.

Note that all economic shortages are a function of a price mismatch and when the price is set below the equilibrium rate or the market clearing price where supply equals demand, there will be a shortage.

The consequences of this market manipulation are as follows:
  • Black markets - people willing to pay more for foreign exchange outside the traditional outlets. 
  • Hoarding - persons purchasing $US and sitting on it for fear of future unavailability.
  • People being forced to use travel money cards or credit cards instead of US cash at additional expense
  • Rationing - artificial controls on demand
  • Non-monetary bargaining methods, such as queuing, nepotism or favouritism
  • Price discrimination - well connected pay one rate while the average citizen pays a less favourable rate. 
  • The inability to get any foreign exchange on demand.
Although an unpleasant reality to confront if supplies of $US continue to be constrained especially as the energy sector languishes the Central Bank will have no choice but to eventually surrender to market forces. The Central Bank also will need to shoulder much of the public derision for the perpetual expansion of the $TT money supply over the last 20 years which has consistently devalued the $TT.

More in depth further Reading: Why US Currency Is So Hard to Come By in T&T 

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