Letters by a modern St. Ferdinand III about cults

Floating currencies are price points. A currency will find its equilibrium based on a number of factors but a floating regime, based on market factors, is preferable [in most cases] to a fixed exchange rate regime. For society there is no doubt that a strong currency based on fundamentals and not artificially high interest rates, is what you want. As long as a strong currency reflects valid underlying economic and political reality, society [and businesses] will get wealthier. Rejoice then as your currency appreciates.

Currencies rise and fall subject to many factors. Currency units are bought if there is a demand for that country's products [engery; raw materials; goods; and services]. If a country has a product like oil, which is in high demand, than its unit of trade becomes more valuable. Economic issues such as reasonable tax rates and debt levels; managed inflation; budget surpluses and strong GDP growth, will likewise push a currency unit higher. The opposite factors will of course deflate a currency. This is not what you want.

Why should people care if their currency is strong vis a vis the U$, the defacto currency reserve for world markets?

For many, it is nothing more than nationalist pride and xenophobia. 'Our dollar is going up and the Yankee's is falling'. While satisfying for the adolescent in all of us, such feelings mean little. A strong currency has five main effects which benefit society in the short and longer term.

First, the purchasing power of the consuming masses goes up. Second, the net assets of the country in question rise along with the net assets of all individuals. Third, businesses will be able to procure productivity saving technology and equipment improving corporate profits. Fourth, businesses will be forced to compete on intelligence, design, value-added and not cheap labor or raw commodity shipments. [This in turn will align wages upward and in the long-term, add jobs.] Lastly and most importantly a strong currency should force governments to do the following to ensure economic growth – cut taxes, cut spending and reduce debt.

The main objection to a strong currency is that exporters lose out. This is a historical nonsense. Brazil's currency has revalued upwards – dramatically – against the U$, yet Brazilian exports are at record highs. Brazil's macro-economic performance in the past 6 years has been outstanding. Inflation is down to single digits, interest rates are reasonably low and economic growth is at 3% on average per annum. While not 'China-like' the improvement over the past 25 years has not been lost on investors. Check out the EWZ exchange traded fund which tracks the Brazilian stock exchange – it has doubled in the past year. Investors and firms are pouring money into the Brazil – because of the Real's appreciation premised on strong economic fundamentals. If a currency alignment upwards was so horrible one would forecast the demise of Brazilian exports and a decrease in business investment. The opposite of course has, and does occur.

Germany's exports are likewise at all time highs even as the Euro pummels the U$ in currency markets. The U$ is at all time lows versus the Euro. Does that mean economic disaster for the EU? Hardly. Thanks to some tepid macro reforms the German economy is improving, taxes in some areas have been lowered, labor flexibility has improved, and spending on subsidies and welfare is being cautiously reviewed and constrained. The result has been an increase in hiring; the purchase of technology and equipment to make better product; and a refocus by the business community on new products and services for export. Just imagine what would happen if the Germans enacted some serious reforms.

German exporters have always been better off under a strong currency regime. Think back to the post War period where the DM was the strongest currency in Europe. German exports reigned supreme then as well. The whole impetus for the Euro project came from Germany which wanted an EU currency based on a hard, or strong, DM. The DM model – low inflation, reasonable rates, and currency stability – is the model for the Euro. What would you rather have – the depreciating Lira which did little to stimulate non-commodity Italian goods, or the strong DM, which helped produce the Mittelbereitung – some of the most competitive firms in the world?

The Americans as well, had an over-valued currency in the 1990s, yet their exports never suffered. South Korea has seen the same process, yet shipments of Korean product directly out of the peninsula are at all time highs. The same story is repeated in Hong Kong, Singapore and – we can make this prediction rather easily – soon China. A strong currency means little when the interplay of market factors including price, quality, and value are considered. You want a strong currency.

Importantly a strong currency should force a realignment of government priorities. As the currency strengthens the short term impact on economic growth might be negative as exports slow and prices adjust themselves [usually downward depending on the market sector and the amount of competition in that sector]. There is also a profit lag from increased [and more profitable] domestic sales against a drop in foreign profits [a more expensive currency abroad means you repatriate less in local currency profits]. These lag periods cause social instability and cries for protectionism, a lower currency, or subsidies.

Governments should ignore the cries of over-regulated business people. In a transition to a wealthier currency governments only have four roles; retrain those who have lost work; lower taxes and spend which stimulates job hiring and capital investment; use the increase in economic activity to reduce or eliminate costly debt and interest payments; and finally, maintain inflation and price stability and reasonable interest rates.

That is all.

A strong currency is what you want. It is just an oft-repeated lie that a strong currency destroys your economy and your exporters. It doesn't. No data supports this position. In fact a weak currency is the opposite of what you want. A weak currency means you import inflation; subsidise firms to ship cheap product with little value-added; and you reduce your national wealth and assets. Would you rather live in Brazil or Zimbabwe? Do you want to be a lumberjack or a computer programmer?

So exporters everywhere – please stop crying. Compete, force your governments to lower taxes and spend, and be happy that you are getting richer.