Currency pegs fail when markets can bet against limited reserves and force devaluation.

Evidence

The only way to maintain a currency peg is to either defend it with foreign exchange reserves or deflate your wages and prices to accommodate it. To defend a peg you need lots of foreign currency so that when your currency loses value (as it will if you are trying to keep up with the Germans), you can sell your foreign currency reserves and buy back your own currency to maintain the desired rate. But if the markets can figure out how much foreign currency you have in reserve, they can bet against you, force a devaluation of your currency, and pocket the difference between the peg and the new market value in a short sale. — Mark Blyth, Austerity, 213

Categorization

• XREF: Connects to Mattei’s austerity analysis; this is the mechanics of why the ERM peg (mechanism of internal adjustment) collapses — the speculative attack mechanism. — connects to: Reflation without capital controls fails when the central bank abets flight. — Mark Blyth, Austerity: The History of a Dangerous…, 553; Democratic politics and internal deflation make currency pegs politically uncredible. — Mark Blyth, Austerity: The History of a Dangerous…, 214; Legacy systems designed for normal price ranges fail catastrophically in extreme markets. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 918 (+5 more)
• DEFINE: Defines the basic mechanics of a currency peg and why a fixed rate is vulnerable to speculative short selling.

Broader Connections

• Financial markets punish redistributive leaders with currency speculation. #exemplifies (0.82) — Clara E. Mattei, Escape from Capitalism, 303
• Fixed exchange rates eliminate both hedging demand and speculation rationale for currency futures #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 645
• Financial markets punish governments through currency devaluation and downgrades (financialization’s disciplinary power). #expands (0.78) — Max Haiven, Cultures of Financialization, 548
• Legacy systems designed for normal price ranges fail catastrophically in extreme markets. #expands (0.72) — Donald MacKenzie, An Engine, Not a Camera, 918
• Speculative wagers can be deployed as counter-power against dominant financial structures #expands (0.72) — Aris Komporozos-Athanasiou, Speculative Communities, 31
• Reflation on the gold standard fails without a supportive central bank #qualifies (0.72) — Mark Blyth, Austerity, 549