Tuesday, May 14, 2013

No Country In History Failed Because Its Currency Was Too Strong

While the world's economies jockey one another for the lead in the currency devaluation derby, it's worth considering the value of the prize they are seeking. They believe a weak currency opens the door to trade dominance, by allowing manufacturers to undercut foreign rivals, and to economic growth, by fighting deflation. On the other side of the coin, they believe a strong currency is an economic albatross that leads to stagnation. But the demonstrable effects of currency strength and weakness reveal the emptiness of their theory.
A country that attracts investment from abroad (through stable and fair governance, low taxes, a growing economy, and a productive labor force) and produces goods that are in demand on the global stage will generally see a rising currency. In essence, this is the reward for a job well done. Strong currencies then help nations stay strong by conferring greater purchasing power to its citizens and businesses, which keeps input costs low, thereby enhancing international competitiveness. Strong currencies also encourage savings, keep real interest rates low, lower capital costs, and allow for greater productivity and higher real wages.
It is often argued that a weak currency confers advantages in foreign trade. But the edge only results from putting exports on sale. Any merchant will tell you that it's easy to sell more if you cut prices, but most would prefer charging full retail. However, exports are not an end in themselves, they are a means to pay for imports. The goal of an economy is not to work, but to consume. If citizens in one nation buy goods produced in another, they must pay with exports. When a nation's currency appreciates imports cost less and fewer exports are needed to pay. This means goods and services at home will be cheaper and more plentiful, and citizens won't need to work as hard to buy them. This is the definition of rising living standards.

Peter Schiff is an investment broker, author and CEO of Euro Pacific Capital Inc. Schiff is known for his bearish views on the US economy and US dollar, and his bullish views on commodities, foreign stocks and foreign currencies