Pet Peeve Number Two, Part Two

So, to continue from previously...

When most people complain about degradation of the 'strength' of the USD, they are talking about either inflation or a decrease in the exchange rate between the USD and other currencies.

Inflation as a problem has already been shown to be, more or less, a myth, although I must stress that inflation quickly becomes a problem when you have too much of it.

Exchange rates are much the same.

An exchange rate is, simply put, how much of one currency you can get for a set amount of another currency. For instance, the USD/Yen exchange rate is how many USD you can get for one Yen (hint: it's not very many).

Simply looking at this fact, it's easy to see how one might come to the conclusion that having a higher exchange rate between the USD and other currencies would always be a good thing. However, this is not really the case.

When the exchange rate is high, foreign goods are cheaper in America and American goods are more expensive abroad, comparatively. Lowering the exchange rate causes foreign goods to be more expensive in America and American goods to be cheaper abroad, comparatively.

There are obviously a lot of odd edge cases where the exchange rate impacts things, but these are the major ones. Essentially, it is easier for businesses to compete with lower exchange rates, while it is easier for consumers to purchase goods at a lower price when exchange rates are high.

A few other key issues - you have higher inflation with lower exchange rates duo to less foreign competition, you have cheaper available raw materials with higher exchange rates, higher exchange rates lead to lower interest rates, and overall economic growth slows with higher exchange rates. (All of these occur in the opposite direction with lower/higher exchange rates.)

Looking at the current problems in America, it should seem fairly obvious that we would prefer a lower exchange rate. Better overall performance by businesses and increased growth will increase the rate of employment, and this combined with higher interest rates and a lack of cheap imports will lead to a higher savings rate and lower consumption rate.

The only real issue here is the potential of higher inflation rates, a problem that we will probably face already in the near future as a result of low interest rates, low savings rates, and absurdly high consumption rates. On the plus side, the other affects of a lower exchange rate will probably help to offset the problem in this instance.

So all those people who claim that higher exchange rates are a boon to the American economy and that we need to reclaim the 'strength' of the USD? They're not only incorrect, they're incorrect in a dangerous fashion. Higher exchange rates would have essentially nothing but negative impacts on the American economy.

I'll put this one down as another "You're bad and should feel bad" belief, even more so than my first pet peeve.

(In related news, this is one of the reasons we really don't like China - they peg their currency to the dollar, so we can't devalue the dollar against it, causing our already terrible trade imbalance with China to grow even worse. China may not be the great economic evil that so many people point towards, but they definitely do some shady things that we really don't appreciate.)

Anyways. Hope you enjoyed the read, and learned something useful. I'm actually thinking I'm going to post something else tomorrow to kind of counteract all of my positivity about inflation from the post before this one, but we shall have to see if I have that kind of motivation when I wake up.