It was hard to look at the financial news this week and not hear a lot about currency.
Anyone who has studied economics at any level knows that despite all of the technological advancements and complicated adjustments within an economic system, price still comes down to supply and demand.
But even in today’s hi-tech world, someone putting his thumb on the scale is still a threat to the integrity of the economy. And now, instead of one store in one town, that thumb on the scale can rock the world.
It was hard to look at the financial news this week and not hear a lot about currency. Amazon is coming out with its own in-house currency to help Kindle owners purchase products for their tablets. This is a knock off of similar programs by Nintendo and Microsoft but it will allow the online company to manage freebies and prizes more easily while ensuring the prizes are used on their own products.
Virginia’s House of Representatives passed a bill to approve spending more than $17,000 to determine if it is a good idea for the commonwealth to create its own currency.
It isn’t, by the way.
Can you imagine the idea that goods manufactured in another state could have their prices affected because of the impact of the value of the Virginia dollar?
The upper house of the state legislature is split evenly down party lines so it is less likely to pass the measure than the Republican-controlled lower house. If they did have their own coin, one strategy would probably be to keep its value lower than the U.S. Dollar used in the other 49 states. That way, manufactured goods would cost less if they came from Virginia and employment would rise as that portion of the economy improved.
While devaluing a currency seems counterintuitive to economic growth, it really isn’t.
It is a similar to a loss leader used by retail stores. On this smaller scale, you can see a similar theory in practice when stores will intentionally lose money on one transaction in an attempt to gain profits from other high-margin transactions in the store.
Many economists believe this same impact can be achieved on a much larger scale. Some countries – like China, Japan, Taiwan, Korea and Singapore – are often accused of keeping their currency values low to keep the costs of their exports down and imports from other countries elevated.
That marginal loss on goods produced can help support millions of manufacturing jobs that bolster the economy as a whole.
Currency manipulation and its impact on the United States and European economic recoveries has been dominating the headlines.
In the United States and Europe, currency manipulation is estimated to have slowed the ability of western economies to bounce back from the global recession by limiting manufacturing companies’ ability to compete globally.
Morgan Stanley has even cited Japan for having an overt policy of intentional devaluation.
“If a weaker yen is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation,” the company said in a note to investors.
Some people remember the 1930’s when an economic depression hit a large part of the globe. Many major economies were still on the gold standard that tied their currency value to the precious commodity. However, when the depressed economies had to invest significantly in wartime expenditures as World War II began, most countries left the gold standard so that they could better control the value of their currency while incurring a lot of debt. Now, no major economy uses the gold standard.
When currencies are compared to each other and traded on open markets, there is an expectation of fairness and equity.
But when countries intentionally sell off their currency to deflate the value of their exports, the playing field tilts in their favor.
This is easier and more tempting to do in smaller economies, but many economists believe China has been as successful as any country in manipulating the monetary system through its totalitarian government.
Some economists say that even if currency manipulation is taking place, its impact on economies will have side effects that negate even the best job creation and support opportunities.
But as the U.S. and Europe try to pull themselves out of a recessed economy, more attention is being paid to countries like Korea and Japan who appear to have a thumb on the scale cheating everyone who does business with them.
Kent Bush is the publisher of the Augusta Gazette, the El Dorado Times, and the Andover American newspapers. He can be contacted at: email@example.com.