At the beginning of the decade, you could exchange a euro and get about $0.90. Today that same euro fetches nearly $1.45. Obviously, this means that gelato you buy in Firenze costs a heck of a lot more greenbacks than it did a few years ago. But hey, quit complaining -- at least you get to go to Europe.
It also means that folks from Germany, France, and Belgium are coming to the United States by the planeload and exchanging their pocket money for suddenly deeply discounted American goods, services, buildings, small towns, and Jerry Lewis memorabilia. The folks running eBay
Know who else is thrilled? The people and companies based in the United States that make stuff. You see, a weak dollar is great for stuff-makers. It's less great for stuff-consumers, but not in the way you might suspect.
Currencies are instruments of national fiscal policy, which is why governments openly and blatantly manipulate their rates of exchange. Think all of the weathervanes on Capitol Hill are sincere when they bellyache about the weak U.S. dollar? Think again -- it's a great vote-getting gambit, because a strong currency "projects" economic strength. But they're perfectly happy for the dollar to remain low.
Make your checks payable to "Boeing"
A weak local currency favors the producers of stuff because it gives those producers an advantage over their foreign counterparts.
This is why, for example, the tides have completely turned in the last few years between Boeing
Cheap currencies are a way of transferring economic power from consumers to domestic producers. No, you're not really writing a check to Boeing. But if you wanted to buy a new car and elected to buy a Nissan
Too rich to buy anything
Now back to Washington, D.C. What do you think politicians believe on the issue of "more American production?" Low currency means high returns on capital (demonstrably true over the past five years); it also means that foreign investors will pour in to chase relatively cheap assets. It also stimulates employment and production, and domestic corporate profitability soars. What could be bad about that? Well, inflation, for one thing.
When I recently traveled to Argentina, I marveled at how dirt cheap everything was. Goods, services, steaks (which in Argentina get their own category, even outside of "goods"), were all priced at a fraction of what they'd cost in the United States (much less Europe). Economic theories on purchasing power parity state that such a disparity ought to even out over time. But notice how "economic theory" is never a candidate for office?
In Argentina, the government "solved" the potential for a weak currency to cause inflation (which is how it works, rather than the other way around) by taxing its agricultural exports. Want to know why foreign investment doesn't pour into Argentina? Witness Exhibit A.
Making things as cheaply as possible
The biggest manipulators of their currencies, though, are in Asia. In fact, for decades, the Japanese favoring of production over consumption stemmed from a systemic depression of yen values. The same thing is happening in China today.
Throughout the world -- even in China -- you hear calls for the government to allow its currency to increase against the dollar. Meanwhile, dirt cheap Chinese labor allows for Nike
The other? Foreign businesses, left with little choice but to up and move their production to where it was relatively cheap -- to China. All because the Chinese have their thumb on their currency.
As the U.S. economy flirts heavily with recession, and domestic consumption drops, do you believe that a weak U.S. dollar is an accident, or something that the government doesn't want?
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