Eli5: How does underground/private money changer make money when they are exchanging USD with a currency that is experiencing a run away inflation?

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Hi as the title suggests. Can someone explain how would private money changer make money if the currency they are exchanging is experiencing a hyperinflation? Why would they do that business?

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9 Answers

Anonymous 0 Comments

If a government wants to manipulate their currency (usually to strengthen it) they can set an official exchange rate which has to be kept to. Similarly they can limit the amount citizens can sell of their currency. That might leave a rich Chinese person (this practice was quite noticeable up to the 80s) who wants to import foreign goods but has reached their quota. There is a limit on how many USD they can buy for their CNY and the officials rate makes the CNY too strong. Meanwhile an American (say) importer or tourist may want to buy CNY and can only do so through the government controlled bank at the official rate.

A broker can solve both problems at once so long as they either do it quietly or bribe the correct people. They buy USD from the American and swap it with the Chinese person at a price they are both happy with. Market correction in action.

During hyperinflation currency exchangers are more likely to minimise the risk of holding lots of useless currency by massively increasing their buy/sell spread.

Anonymous 0 Comments

If a government wants to manipulate their currency (usually to strengthen it) they can set an official exchange rate which has to be kept to. Similarly they can limit the amount citizens can sell of their currency. That might leave a rich Chinese person (this practice was quite noticeable up to the 80s) who wants to import foreign goods but has reached their quota. There is a limit on how many USD they can buy for their CNY and the officials rate makes the CNY too strong. Meanwhile an American (say) importer or tourist may want to buy CNY and can only do so through the government controlled bank at the official rate.

A broker can solve both problems at once so long as they either do it quietly or bribe the correct people. They buy USD from the American and swap it with the Chinese person at a price they are both happy with. Market correction in action.

During hyperinflation currency exchangers are more likely to minimise the risk of holding lots of useless currency by massively increasing their buy/sell spread.

Anonymous 0 Comments

If a government wants to manipulate their currency (usually to strengthen it) they can set an official exchange rate which has to be kept to. Similarly they can limit the amount citizens can sell of their currency. That might leave a rich Chinese person (this practice was quite noticeable up to the 80s) who wants to import foreign goods but has reached their quota. There is a limit on how many USD they can buy for their CNY and the officials rate makes the CNY too strong. Meanwhile an American (say) importer or tourist may want to buy CNY and can only do so through the government controlled bank at the official rate.

A broker can solve both problems at once so long as they either do it quietly or bribe the correct people. They buy USD from the American and swap it with the Chinese person at a price they are both happy with. Market correction in action.

During hyperinflation currency exchangers are more likely to minimise the risk of holding lots of useless currency by massively increasing their buy/sell spread.

Anonymous 0 Comments

Even 100% inflation a year is just a few percents a week, i.e. you can’t use such a currency for saving, but still can use for transactions, especially that simple.

On top they profit from tax evasion (in Argentina you pay 35% tax on buying dollars with pesos) or bypassing the prohibitions.

Anonymous 0 Comments

When an underground/private money changer exchanges USD with a currency that is experiencing runaway inflation, they typically use the black market exchange rate, which is higher than the official exchange rate set by the government. This is because the official exchange rate often does not accurately reflect the true value of the currency in the market.

The underground/private money changer will buy the local currency at a lower rate (typically below the official exchange rate) and then sell it at a higher rate (typically above the official exchange rate) to individuals or businesses who need the local currency for their transactions. The difference between the buying and selling rates represents the profit margin for the money changer.

In situations of runaway inflation, the demand for hard currency such as USD is typically high as people try to protect their wealth from being eroded by the inflation. This creates a market for underground/private money changers to profit from the difference in exchange rates.

It’s worth noting that engaging in underground/private money changing is often illegal and carries significant risks such as arrest, imprisonment, or being robbed. Additionally, those who engage in this activity may be contributing to the instability of the local currency and the wider economy.

Anonymous 0 Comments

Even 100% inflation a year is just a few percents a week, i.e. you can’t use such a currency for saving, but still can use for transactions, especially that simple.

On top they profit from tax evasion (in Argentina you pay 35% tax on buying dollars with pesos) or bypassing the prohibitions.

Anonymous 0 Comments

When an underground/private money changer exchanges USD with a currency that is experiencing runaway inflation, they typically use the black market exchange rate, which is higher than the official exchange rate set by the government. This is because the official exchange rate often does not accurately reflect the true value of the currency in the market.

The underground/private money changer will buy the local currency at a lower rate (typically below the official exchange rate) and then sell it at a higher rate (typically above the official exchange rate) to individuals or businesses who need the local currency for their transactions. The difference between the buying and selling rates represents the profit margin for the money changer.

In situations of runaway inflation, the demand for hard currency such as USD is typically high as people try to protect their wealth from being eroded by the inflation. This creates a market for underground/private money changers to profit from the difference in exchange rates.

It’s worth noting that engaging in underground/private money changing is often illegal and carries significant risks such as arrest, imprisonment, or being robbed. Additionally, those who engage in this activity may be contributing to the instability of the local currency and the wider economy.

Anonymous 0 Comments

When an underground/private money changer exchanges USD with a currency that is experiencing runaway inflation, they typically use the black market exchange rate, which is higher than the official exchange rate set by the government. This is because the official exchange rate often does not accurately reflect the true value of the currency in the market.

The underground/private money changer will buy the local currency at a lower rate (typically below the official exchange rate) and then sell it at a higher rate (typically above the official exchange rate) to individuals or businesses who need the local currency for their transactions. The difference between the buying and selling rates represents the profit margin for the money changer.

In situations of runaway inflation, the demand for hard currency such as USD is typically high as people try to protect their wealth from being eroded by the inflation. This creates a market for underground/private money changers to profit from the difference in exchange rates.

It’s worth noting that engaging in underground/private money changing is often illegal and carries significant risks such as arrest, imprisonment, or being robbed. Additionally, those who engage in this activity may be contributing to the instability of the local currency and the wider economy.

Anonymous 0 Comments

Even 100% inflation a year is just a few percents a week, i.e. you can’t use such a currency for saving, but still can use for transactions, especially that simple.

On top they profit from tax evasion (in Argentina you pay 35% tax on buying dollars with pesos) or bypassing the prohibitions.