By Professor Ricardo Ulivi, Ph.D.
There is a currency war going on in international markets. What does this mean?
Many countries are facing reduced or no economic growth, and this causes unemployment. Governments don’t like that, so they call meetings to figure out how to get their economies moving. The answer is simple: export more. But, if you already export as much as possible, how can you improve? The answer is to reduce the prices of your products. Manufacturers don’t like that, because it reduces their profits. So, how can you increase your exports without reducing your profits? Lower the value of your currency!
Solve Your Problems by Exporting More
This is what China is attempting to do. In the last few days, they reduced the value of their currency with respect to the US dollar. This means that their products are now cheaper, so US consumers can buy even more of them. Devaluing the Chinese currency makes buying American products more expensive, so Chinese will buy fewer goods and services from us. The result of all this is two fold: it will increase employment in China, and it will reduce employment in the US. In other words, the Chinese become richer and we become poorer.
Wait: It Gets Worse
Everyone knows that the Europeans are having economic growth problems. How can they solve this? Devaluate! Sure enough, they have lowered the value of their currency, the euro, with respect to the US dollar by about 25% in the last few years. This allows them to export more to us, which reduces their unemployment, while it reduces their imports from America. In other words, their employment grows, and ours shrinks. They get wealthier and we get poorer.
Brazilians: They Are No Dummies
Brazil is having unemployment problems, along with major corruption problems, and the people have become critical of their government. Politicians need to act quickly. What’s the recipe? You got it: devalue the currency, which is exactly what the Brazilians have been doing for the past few months.
They export more to America, we export less to them. They win, we lose.
What’s the Score?
China, Europe, Brazil, even the Japanese are devaluing their currencies to export more, and import less. In other words, they are trying to solve their economic growth problems by harming the US. We are losing the game big time. The trade deficit is in the hundreds of billions of dollars, and we are becoming poorer as a result.
But employment is still growing in the US. While this is true, it is growing at a far slower rate than if these other countries were not devaluing their currencies.
Is there a silver lining for us? Of course there is. If you travel to Europe, China, Japan or Brazil, it’s far cheaper than a year ago. If you buy their goods, it’s cheaper than a year ago. But, don’t forget–sooner or later we Americans will all pay the price of this war–the currency war.
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Have a wonderful week.