Why does a currency crisis develop? Usually it is a markets way of express
significant doubt about the macro economic policies of a country. Does
fixing the exchange rate change any of this? No, what tends to happen is
those in power continue to get their money out, at the fixed exchange rate
while the market value (if it were allowed to establish itself) falls
dramatically. So the little guy gets screwed by politicians, not terribly
surprising. As fixing the exchange rate does nothing to address the
underlying fundamental problems, eventually the price of fixing will become
unsustainable. What proponents (politicians) of fixing are hoping is that
the currency crisis is strictly a problem of investor confidence in their
policies, and that fixing will ally this. All well and good, but I can not
think of a currency crisis in the last twenty years that the country
involved did not have serious political and economic problems!
