No other economic topic is more confusing and has been least properly understood by the public than the exchange rate system. Politicians love to use it for the opportunistic advantage it offers to blame foreigners for their fellow countrymen’s failure to economically compete. Academics love to use it to make a point for a half baked truth.
They may all have a point. The problem is that the points will all have only half of the truth. The politicians’ opponents and the academic’s rivals could all be right at the same time since there are always two sides to an exchange rate’s impact on the economy more like there are always two sides of a coin. More often than not it is completely futile to make an argument on what is better to have, a stronger exchange rate or a weaker exchange rate, for a specific short term purpose.
For short term purposes, when a country’s currency is stronger it is good for the assets and when it is weaker it is good for the country’s liabilities. A weaker exchange rate may help stimulate the domestic economy by creating more foreign demands for its commodities and goods but it will cause a permanent wholesale destruction of the country’s aggregate wealth in the global market place. A stronger currency may serve to slow down its domestic economic activities and hence lower inflationary pressure by reducing foreign demand but it may create permanent wholesale advantage and sudden increased wealth for every one of its citizens.
Over the long run, a country with a stronger currency commands confidence and respect of every human being on earth, could easily afford to develop more leading edge scientific discoveries and engineering monuments, let alone a much stronger military defence force. It also naturally speaks much louder in global politics, attracts top talents to migrate and work for it to further enhance its competitiveness. Therefore the strength of a country’s exchange rate is really a report card of its government’s performance, as fully discussed in my prior blog post on 10/15/2010, “Foreign exchange rate is the competency report card of a government’s ability to manage a country’s economy”.
So next time you read an op-ed commentary, hear a comment by a guest speaker on TV, or study an academic paper arguing for weaker currency, perhaps you would like to find out whether the person has a political agenda trying to spin a story to confuse the public or perhaps he/she is simply a complete moron.
Hoping to gain short term export advantage to create temporary transient job opportunities instead of focusing the collective efforts on increasing longer term productivity or economic competitiveness by promoting diligence, hard working ethics and/or innovations will simply continue the wholesale destruction of our country’s wealth and eventually reduce us from a major league super power to a little league weenie power.