Many thoughts I’ve been pondering lately have been about currency and more specifically, why every country is intent on devaluing theirs. It seems ass backwards to me, that a country would want their currency to be less powerful, as if a company would want their stock to be less powerful. The currency of a country really can be likened to the stock of that country, no?
Let me preface the rest of this by first saying that I’m not an Economist, nor do I have any post-graduate education in the field. I only know what I’ve read and taught myself, thus my conclusions may be inaccurate. I’m merely trying to create a discussion here, mostly to continue my learning from those who perhaps know more than I do.
Now, here’s what I know about a weak currency and the benefits it brings:
1) Cheaper exports. This leads to a stronger GDP and thriving exportation businesses as their goods are priced more attractively to foreigners.
2) Cheaper debt. A devaluation over time in the currency that your debt is denominated in means it is easier to pay back.
Now, I’d like to make an argument as to why Americans should cheer on the dollar, and dislike the inflationary tactics that have lead to the dollar’s whamboozling.
1) A stronger dollar makes imports cheaper. This makes it easier for Americans to purchase goods, as they can buy more of a good per unit of currency. Oil, electronics, cars and other massively consumed, imported goods would instantly be more affordable.
2) A stronger dollar attracts investment from abroad. Foreign capital will be attracted to invest in assets denominated in a safe and strong currency.
3) A stronger dollar attracts domestic investment. This is incredibly important, as the U.S. would be less reliant on foreign investment, and would be able to satisfy debt supply from within its own borders.
4) A strong dollar forces production efficiency. Business will be the ones left to manage technology vs labor and businesses will be the ones forced to run as optimally as possible. While you may argue that a strong dollar hampers a business because of higher input costs, I argue that the best businesses are left to survive in a very Darwin manner. This is extraordinarily beneficial, especially after the recent economic mess, where a lot of the fault can be laid on the shoulders of the businesses who were messy, risky and inefficient.
In reality, the only real downside that I can see to a very strong currency is a reduction in exports.
But imagine this: A country whose currency is immensely strong and that produces everything it needs. Why do we (U.S.A.) have to import so much fucking shit, anyway? Are you telling me that American ingenuity and technology cannot compete with slave labor abroad? If so, then just make a better quality good. I believe there are two ways to compete, price and quality. Over here in America, we pay higher prices just to pay higher prices and think highly of ourselves. I’m sure if the higher price of a domestically produced good was actually warranted due to a better quality good, we would be ecstatic to purchase that good. So, in continuation, a country that has an uber strong currency and produces most of everything it needs. And what it does need to import, is cheaper anyway because the currency is stronger. Further, the country can finance all its own debt, because its citizens gladly invest in the currency due to its strength.
It seems to me like the Keynesian approach to a world-wide currency battle of who can LOSE THE BEST is completely ignoring the truth of the situation: a stronger currency explicitly leads to a higher standard of living for its users.
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Good post.
When people talk about the dangers of a strong currency, they are typically referring to the drama of the pound sterling just after the turn of the 20th century.
During this time, Britain, intent on not devaluing its notes after incurring the costs of the Great War, busied itself trying to restore the value of sterling to what it traded to the U.S. dollar before the fighting broke out.
The thought process went that if London broke its promise of sterling, it would cost it the seat of financial power as banker to the world that it bore up until that time. Thus, London went on a campaign to regain its lost supremacy by withdrawing the number of pounds.
This proved to be a calamitous move on the part of Norman Montague, the head of the Bank of London, as it led to mass unemployment while America, with her then vast gold deposits, continued to lead the banking industry in the after years (and arguably to this day).
It was during this time that John Meynard Keynes began making his predictions about the need to weaken sterling and the effect it would have.
For the record, Keynes was probably right, at the time. However, extending his thoughts on the 1920’s to the 2010’s is also probably not a wise decision on the part of the Keynesian zealots.
Whereas before London was pursuing a strategy of maintaining a currency that was too strong and had much relief once they abandoned that extreme path, I would argue that today, as you have suggested, America is pursuing a strategy of maintaining a currency that is too weak.
There is much easy relief that could be issued to the population by simply allowing the dollar to strengthen, in the form of cheaper goods and higher rewards for savers. Money is as cheap as ever, yet people are not rushing into housing or the other “normal” outlets.
As usual, it is the balanced approach that would reap the greatest benefits.
Agreud.
The current devaluation regime is a race to the bottom and can only end badly. I don’t agree that we don’t need global trade however, as there will always be mutual benefit drawn from comparative advantage transactions between trading partners.
There are certain manufacturing processes that should be done by lower skilled lower wage laborers overseas, simply because our own labor pool is an asset that should not be underutilized in lower value added processes which will inevitably lead to stagnant wages.
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Like playing “bet your fingers” with a drop press?
Well, yeah, but I’m not even talking about the safety aspect, although that’s certainly a factor.
I’m talking about how an increasingly skilled workforce, with the help of technology, can continue climbing the value-added manufacturing ladder, and continue to increase standards of living across the board in this country.
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I agree. Americans are hesitant to take up the low paying production jobs. Likewise I agree that some countries are better suited for certain tasks, and do have an actual comparative advantage. I’m not saying to remove global trade — although if it were possible, I’d say go for it — I’m just saying that we can compete with the low priced goods by producing a better quality good, and having our higher per capita income population purchase it. That would lead to higher labor wages anyway, since the more skilled labor would be required to produce a higher quality good. Or companies would choose to substitute technology for labor, which would reward intellectual advantage and still drive our economy. Where am I wrong and why does the entire world disagree with me?
Then, on another note, why doesn’t China do this? They already dominate the slave labor market, and they have a burgeoning middle class, so they could easily manufacture everything they need, allow the RMB to appreciate, sell their foreign assets thereby killing other economies (mainly ours) and not be affected because they don’t depend on our imports anymore. Holy shit, seems like everyone is going about it backwards.
Why hasn’t anyone before now?
1. It’s difficult to manage total economies; our demand is a useful directive to avoid malinvestment.
2. People don’t like being slave labor and China needs the rest of the world to raise their own standards or risk widespread riots.
3. Interest groups in China want a weaker RMB; it makes them richer.
I’m just saying that we can compete with the low priced goods by producing a better quality good, and having our higher per capita income population purchase it.
It’s all about choices. Not everyone wants, or can afford “the high quality good.” Some people want or can only afford the cheaper thing.
Do you always buy top of the line, all the time?
And global free trade has other benefits besides economic (which are very big benefits). Global trade also promotes PEACE.
Can you imagine if we were a self enclosed capsule, and somehow able to build our wealth with no contact with the outside world?
How long do you think it would take before someone would decide it’s time to try to take that properity away?
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I’m not the sharpest tool in the shed here, but just want to add-
As everyone well knows, currency debasement makes price of assets go up (at least for a while). People who own them love that, especially if they are leveraged. It is a great game for some, and I think those people may be the most wealthy and powerful.
When the “little people” got to play and levered up with housing, they were slapped down.
You want to see mayhem, choose deflation. The poor would benefit but everybody else would blow a gasket. My day to day life would be more harmed by the angry rich, than by the angry poor.