If you read Superman comics as a kid, you probably remember Bizarro, Superman’s evil double, and Bizarro World, the skewed reality he inhabited. Everything in Bizarro World resembled in a perverse and twisted way some corresponding reality in Superman’s world.
The various news accounts about the shifting value of the U.S. dollar remind me of Bizarro World.
Stories written for U.S. audiences by U.S. news sources generally describe decreases in the cost of the U.S. dollar as bad news. But when I shift my Internet browser to read stories written in Brazil, Japan, Canada or the European Union, the corresponding increase in the value of the real, yen, Canadian dollar and euro against the dollar also is portrayed as bad news.
Some examples:
Just a few weeks ago, Canada’s Finance Minister John Manley was called before Parliament in Ottawa to defend the government’s economic policies and to reassure MPs that the increased value of the Canadian dollar against the U.S. dollar is not a failure of the Chretien government.
Since then, other Canadian cabinet members and the head of the Bank of Canada have portrayed a strong Canadian dollar in positive terms. Despite such government spin, the overall tone of economic reporting is that a stronger Canadian dollar threatens that country’s economy, even though it’s arguably performing the best of any wealthy country right now.
In Brazil, newspapers and magazines are full of reports on the strengthening real. The center-left government of Luis Ignacio da Silva has had to state repeatedly that it does not see a need to intervene in currency markets to drive the value of the real back down.
Government economic officials have pointed out that while a more expensive real, in dollar terms, will decrease Brazil’s exports to the U.S., there’s less chance of that happening in Europe. The real’s increase against the euro is much smaller.
Despite that reassurance, Brazil’s farmers know that a more expensive real and a cheaper dollar combine to make U.S. soybeans more competitive in world markets than they’ve been for some time.
The Japanese government is not as sanguine as those of Canada or Brazil. Japan has always followed a policy of keeping the yen as cheap as possible. This past week it reportedly has been buying up dollars (and selling yen) in an effort to keep the yen from increasing in value relative to the dollar.
On Monday, Japan’s Finance Minister defended that policy in response to comments by U.S. Treasury Secretary John Snow that made clear the Bush administration would do nothing concrete to back up the “strong dollar” rhetoric it consistently has mouthed.
Like the Japanese, European officials and media see their stronger currency as almost unalloyed bad news. Some officials have tried to put a positive spin on a more expensive euro by pointing out that it will “pressure European manufacturers to be more competitive” and “put downward pressure on inflation.” Both these assertions are true, but the comments have a decided air of whistling in a graveyard.
German and French manufacturers don’t need stiffer competition in world markets right now. And inflation in Europe, as in the U.S., is not a problem.
So what is going on? If a more expensive currency is described as bad news in virtually every country so affected, why isn’t a weaker currency viewed as good news here? Is the United States some sort of Bizarro World where every rule is twisted into a perverse opposite?
The answer is no.
Changes in the value of our currency affect the United States in exactly the same way as changes in the value of their currencies affect Canada, Japan, Brazil or the 12 countries that use the euro.
A more expensive (stronger) currency helps consumers and hurts producers. It makes exporting harder and importing easier. Any business that has exports or has to compete with imports is hurt by a more expensive currency. But households find that goods are cheaper. That is why an expensive currency holds down inflation.
A less expensive currency helps producers and may hurt consumers. It makes exporting easier and importing more difficult. Businesses that export or compete with imports benefit from a cheaper domestic currency. Households may find certain goods are more expensive and inflation is somewhat stronger.
The effects of currency fluctuations are like the effects of rain in farming. Rain is needed to grow crops, but when fields are saturated, it can be harmful.
With inflation low, unemployment high and a stagnant manufacturing sector, a weaker dollar is almost entirely good news for the United States right now. There is a point when a cheaper dollar becomes harmful, but we are far from there.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.