Thursday, June 16, 2011

A Weak Currency is Good for Exports? Not!

Posted by bionic mosquito on 06/16/11 11:57 PM

"When the FED adds to the money supply through QEs, it cheapens the USD/FRN and makes U.S. products more competitive in world markets."

This mercantilist strategy is not so cut and dry. Japan has had one of the strongest currencies in the last several decades, and still runs a trade surplus. Germany as well, first with the Mark, now with the Euro. Meanwhile, the US has had a relatively weak currency over the same time, and has also seen its balance of trade grow worse during this same time.

It is often said: in order to consume one must produce. True as it is, the opposite is true as well: in order to produce, one must consume. In order to manufacture, one must buy raw materials.

What good is it to an exporting firm to have a week currency, when most of the inputs to production (commodities) have global prices? One might consider that the reason Japan is so competitive is that the strong yen has kept oil, steel and other raw materials needed for manufacture at much lower yen prices than what the US has realized with the dollar. As material and energy is often a majority of the cost of any manufactured good, it would seem a strong currency is of more benefit to an exporting nation than a weaker currency.

Posted by bionic mosquito on 06/17/11 12:13 AM

I will add, this idea of weakening a currency to improve exports gets even nuttier. Most manufacturers produce more for their home market than for export - this is especially true for small businesses, but consider even US auto manufacturers.

So, for the majority of sales, a weaker currency is devastating, as it inherently increases the costs of commodities that are priced globally - again, likely a majority of the COGS.

Nuttier still, big business can often work around this - it is easier for General Electric to locate a factory in China or Vietnam than it is for Joe's machine shop. This is true for countless reasons.

So the small guy gets fried, and the big guy can get around it by relocating manufacturing overseas AND pick up market share in the home market after the small guy files bankruptcy.

And we wonder why the US continues to lose manufacturing to foreign firms.

Ultimately one must conclude that this idea of a weak currency helping exports is only a Trojan horse; it is the advertised idea to make palatable for the masses that which is only good for big business. Just one more illogical theory in a long list of theories taught at the school for the economically gullible.

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