Tuesday, 26 July 2011

On rich countries and strong currencies

If you're someone who can't go for the idea no country wants a strong currency just because it wants an export advantage over its trade partners, let's look at it from another angle.

If your currency is too strong, you're probably paying your workers a lot more than workers elsewhere in the world. For a start off, this provides them with more disposable income than elsewhere, meaning they will eventually and inevitably bid against each other, raising the prices of goods and services. There is a higher cost of living in "rich countries" than in poor countries, the same product often for sale at a significantly higher price just because the local market can support that higher price.

Additionally, if your currency really starts to get very strong in comparison to some others, it seems to me it will be cheaper for your population to import than to buy locally produced goods and services (see: export of jobs to the Far East from The West over recent decades, unsustainable trade deficit problems).

An overly-strong currency not only undermines any export advantage you might like to enjoy, but also over time will gut your domestic economy.


Blondie said...

Yes, I've had an interesting discussion with RBNZ about strong currencies (look at a chart of the kiwi) and the role gold reserves can play in this regard (they have none).

Their weak arguments and evasion of my questions lead me to believe that NZ's best interests may not be their primary priority. Either that, they are exceedingly clever (and opaque) or exceedingly stupid.

They definitely have a policy that they may not address the topic of counterparty risk, nor directly acknowledge its existence.

DP said...

Well, it doesn't seem likely option 2 is your answer, so at least that
narrows the scope of your search by 33%... :)

DP said...

A couple of stories that illustrate the takeaway point from this post: that no country wants an over-strong currency. Both are courtesy of MarketWatch, with the first link being new today, and the second being a very-much-related storay from about a month ago.
Swiss franc plunges as SNB moves to halt rise

Swiss Parliament to discuss gold franc

IMO this adds up to a neat little summary of why Freegold-RPG *will* happen.

dogmatix.dm said...

Yep, we're feeling it pretty badly here in Australia.

Our media keeps saying how great it is that we can buy cheap stuff online. Erm?

Meanwhile our manufacturing sector is almost dead, retail is almost dead, and exports are also suffering.

Dutch Disease they call it. Also the 'Resource Curse'.

Our central bank has been increasing interest rates to fight inflation - which has just encouraged the import of foreign capital which raises our dollar even higher.

Oh boy are we in for some trouble when that carry trade reverses. Our banks will suffocate and our huge private debt will become huge public debt in a matter of months.

Im thinking of other places I might want to live.

DP said...

Telegraph:Switzerland acts to curb franc's rise

DP said...

BBC:Australia's unemployment rate jumps to eight-month high

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