The value of the dollar by itself doesn't mean anything, though Megan McArdle notes that many folks worry about it., but it's also happening for a reason and those reasons are at least potentially concerning. This is one area where economists are guilty of glad handing the issue. Having taught econ for several years now, when I point out that a weak US currency means more exports, and hence, more jobs, I've come to expect eye rolling and disbelief. And if I'm honest about it, it's not because my students are a bunch of morons. It's because I'm making an incomplete and unconvincing explanation. As a practical matter, I think the problem is intractable. To make a full explanation that might convince weak dollar alarmists, I'd have to spend weeks, and I can't do that in an intro econ class. And to be honest, I don't think the average teacher of economics is up to it. I'm not sure I am. Because, while I think the alarmists are generally very wrong and a weakening dollar isn't the end of the world, I don't think it's an unambiguous good either. Or even a simple case of "exports cheaper, imports more expensive". Perhaps someone else could set me straight, but I do see reasons to be concerned. If currency fluctuations were truly open and generally reflected the real conditions in various economies, there wouldn't be as much cause for concern. Gradual weakening of the dollar and strengthening of the renminbi wouldn't be that traumatic. But we know that's not the way the world works. Currency flows are subject to many non-market institutional factors that prevent a standard market equilibrium type outcome from occurring. The Chinese and other Asian governments encouraged dollar buildups. Our government has certainly encouraged it. And no one thinks such a situation is sustainable forever. So if these policies are gradually changed, we get somewhere good, even if the end result is the dollar weakens. If the dollar weakens, however, due to speculation, panic, or some other proverbial straw that breaks the camel's back then we'll have uncontrolled and very sudden swings in currency value, capital flows, and real market-production influencing factors. That could be disastrous.
Personally I'd want the US to have a strong dollar, it hurts us a lot going to EU (being that most of our family is there) and having to exchange it into Euros and we are always at a loss. I don't see how the dollar will get stronger though, and some people have started suggesting that we change it to the Euro even here in the US something I cannot see it happening. (even though I wouldn't mind it)
Teaching it should be rather easy. If there are 100 yen to the dollar and a can of soda costs a dollar, then the japanese can buy a soda for 100 yen. If the dollar weakens, then there's 95 yen to the dollar. The japanese trade 95 yen for a dollar and buy the can of soda. At a 5% discount. The 5% discount is attractive to foreigners to buy our sodas (products). But the flaw in this line of reasoning, that a weak dollar is a good thing, is that foreigners aren't buying sodas, they're buying the empire state building and universal studios. We're not shipping product, but the means of production. A weak dollar is good fiscal policy as a stimulus, but not as a general rule. IMO.
Yeah, I go to Belgium every couple of years, and I have more sticker shock each time. Of course, a lot of that also comes from the VAT and whatnot though.
In theory there's no difference. In practice, of course, it takes more time to reorder production than it does to complete a particular transaction. In every foreign country I've ever been, they like soda. They also like to buy it for as cheap as they can get it. Thus, if everything in America is suddenly at a discount, you can hire Americans for cheaper than you used to be able to get them to make soda for you.
Right, but if the dollar is so cheap, you'll end up with a typical japanese citizen being able to afford to by Pepsi Cola, Inc. Their stock is being sold at a discount, too. In the short term, selling sodas at a discount is great because it can kick start the soda manufacturing business. In the long term, we in the USA will be paying $1 for a soda with any profits going to some overseas company. So my position remains. If we're in a recession, weakening the dollar is a good way to attract foreign spending and investment. Once we're out of the recession, the dollar should be made stronger so we can keep as much ownership of our means of production as possible.
In a relatively free trade and free capital transfer world, it doesn't matter much whether the owner of a company is in the same nation as i am. What matters is a relatively consistent flow of transactions. When that goes on, the standard economic model generally holds. That is, a currency will weaken if the country is in a recessions and strengthen when it comes out of a recession automagically. It's generally better to think of this in terms of some other country to be objective. Suppose Japan is suffering through a recession to a greater extent than the US, and its currency is relatively weak. If I purchase, say, a factory in Japan, a Japanese shouldn't feel that I'm depriving them of any profits. Because even though I'm American, the profits that accrue to me from running that factory in Japan will accrue to me in Yen. So my options with my Yen profits are the following. 1. I spend them on anything I can buy with Yen. That's exactly what a Japanese owner would do, however. So it's not really any better or worse for the average Japanese at that point for their company to be owned by another Japanese or by an American. 2. Convert Yen into dollars to carry the profits back home to the US and spend them here. But if the Yen continues to be relatively weak, that's not going to be a very good deal for me. My Yen profits will get me very few dollars in return. Now, as the Yen strengthens (which will happen as people start wanting to hold more Yen to buy increasingly productive Japanese output), this changes and it makes sense, if I want, to convert back to dollars. However, the values really only sort of equal out. As I'm now the owner of a productive asset in Japan, I continue to have an interest in maintaining and growing that asset. And while I would probably want to convert some of my Yen profits back to dollars, I can only do that if there are some other folks around that have dollars and want Yen. So there's a balance to be had. Again, my nationality wouldn't make any difference here though. A Japanese owner, if he saw the Yen appreciate. Would also have an incentive to buy some dollar denominated investments as they became relatively cheaper. All of this is to say the problem isn't based on the fact of different currencies or international trade in some basic sense. A purely free market international transaction system would work about the same as intranational transactions, despite the differing currencies. As I was saying in the original post, the problem isn't the presence of international free trade or the relative value of the currencies themselves, but the fact that many key governments create restrictions that prevent currencies values from disposing with their investments as they see fit. Remove those restrictions and you'll still have fluctuating currency values but you remove the big dangers involved with creating what are basically currency "bubbles" in which case a country builds up a stockpile of another country's currency. In the end, that situation, which is the present state of affairs, isn't good for anyone. If we look at ourselves and worry that "we owe the Chinese", we also ought to consider the fact that the Chinese should be equally concerned about the value of their savings. A dollar collapse would be render their savings worthless.
All that is a long way of saying that when you've had your fill of Pepsi, you buy the company at a discount. In your own words, "Convert Yen into dollars to carry the profits back home to the US and spend them here. But if the Yen continues to be relatively weak, that's not going to be a very good deal for me." I don't see any benefit in selling off the nation's assets at a discount.
No. I just don't think the currencies should fluctuate. They should be backed by gold or something like it, so you're effectively trading one pepsi's worth of gold for a pepsi.
Is that because you favor a single currency, or you think the currency should be commodity backed? Like, if every country adopted the same currency, say the Euro, we would always denominate Pepsis in Euros. Of course, a Pepsi wouldn't cost the same around everywhere, and in economically distressed areas, you could come by Pepsis, and even Pepsi factories at a discount compared to economically strong areas. If we're talking about having different currencies, but then backed with a commodity like gold, silver or oil, we'd still get fluctuating values since the value of gold, itself, fluctuates, as well as the holdings of particular countries. Or to put it differently, why shouldn't currency values fluctuate? We know that that our ability and willingness to buy and sell most everything changes as we go through life.
My bad. I should have been more clear. By fluctuate, I meant "govt. controls the value by printing more or less currency."
Unfortunately, history is replete with governments manipulating the value of currencies even when they based their currency on gold. This ranges from the subtle (leaving the gold standard whenever it suited them throughout history) through hoarding gold, debasing the currency to the extravagant. The most extravagant would probably be the Romans and other classical societies, and then the Spanish Empire essentially wasting huge amounts of productive assets to accumulate the essentially non-productive but valuable gold. The Spanish, in particular, merit special note. They created possibly the first world-spanning empire, and their main goal in doing so was to enslave local populations force them to mine gold and silver, and then, at great expense (in terms of using resources to get it there), ship it back to Spain. The great irony in this is that the gold really didn't yield much in terms of additional value, because its prime use was as a medium of exchange. Thus, Spain experienced rampant inflation and little growth. They then compounded this disaster by kicking out entire classes of productive workers, Jews and Moriscos, thus lowering their society's productive capacity. Happy Thanksgiving!
