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November 02, 2005
Why I don't like currency stories
I will admit it--I don't like currency stories. The dollar is up, it's bad news. The dollar is down, it's bad news.
Case in point--the story on page C1 in today's WSJ. The headline is "No (Dollar) Gain Without Pain", putting a negative spin on the currency rise, including the possibility that it could "threaten economic growth."
Of course, if the dollar had fallen, everyone would be writing negative stories about how a weak dollar reflected the weakness of the U.S. economy.
My take: Currency movements help some people, and hurt others. Maybe we shouldn't be calling the dollar "strong" and "weak". Any suggestions for new terms?
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How about "cheap" dollar and "expensive" dollar?
Posted by: d edwards at November 2, 2005 01:12 PM
'Cheap' and 'expensive' doesn't quite work for me either. Compared to what?
Posted by: Mike Mandel at November 2, 2005 05:22 PM
Ahh - weak and strong ________(place currency here). Also a pet peeve of mine. "Cheaper" and "dearer" might work in some instances - the comparison is between current and previous values. In this way we talk about "dearer" oil (more expensive compared to the recent experience, i.e. 1990s.) However the next question is the denominator: cheaper in what terms? Well, all international discussion about currency value should adopt a convention of quoting the value of currency X against the US$ only. (Its happening or happened already. Kind of like using English.)
For the US$ itself, its value should be tracked against some basket of foreign currencies. (Mirroring talk outside the US about the values of currency X's). This is not for policy purposes, but purely out of convention. The IMF can take the lead on this by modifying its Real Effective Exchange Rate indices.
Posted by: Econblogger at November 2, 2005 09:39 PM
The idea of a falling or rising value does help. But what is more important, obviously, is what we expect to happen in the future.
Suppose that the dollar falls. That makes it cheaper for foreigners to invest in the U.S.--unless they expect that the dollar will keep falling. What matters is whether the dollar is expensive or cheap relative to its future value.
(I should say that I am partly trying to think these things out myself--maybe what's needed is a future dollar story).
Posted by: Mike Mandel at November 3, 2005 08:56 AM
Tracking other currencies against the dollar, and the dollar against those same other currencies, makes no sense. It's like quoting the price of apples in oranges, oranges in apples, and then trying to use that to determine the price of apples in apples.
Example: There are three currencies, the dollar, A and B. 2A = 1 dollar. 3B = 1 dollar. if the dollar is tracked in value against a "basket" of 1 A + 1B, what is the vallue of the dollar in dollars?
Posted by: Some Guy at November 4, 2005 09:30 AM
This seems to be a place where ideas are ping=ponged back and forth. May I use it for another purpose?
I want to get some feedback on setting up new rules for playing the game of "understanding the trade deficit."
The reason I pitch here is that Mandel has previously said that : 1) The Net Worth of 49 trillion owned by Households and non-profit organizations should not be ignored. 2) Savings is overrated. Taking these two propositions and combining them with two other obvious propositions leads to a new way of analyzing our trade deficit and its interdependence with the rest of our economy.
The two other propositions are: 3)There are many alternative sources for funding domestic investment in an open society. 4) Financial assets are stored as well as created in every society.
Send your E-Mail address to email@example.com and I will send you a copy of this paper.
Posted by: W. Raymond Mills at November 4, 2005 09:04 PM