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Nothing Happens in a Void, Part I of II
That’s right – everything is connected. For every action, there is a reaction – especially in the physical world.
Way back several hundred years ago, a very smart man developed Newton’s Third Law. His name was Isaac Newton – you all knew that.
His law specifically states that for every action there is an equal and opposite reaction of the same force.
That’s how an airplane gets into flight – the thrust of the engines going toward the back of the plane creates the forward thrust to move the plane forward and the wings help it overcome gravity.
It’s simple physics at its best.
Now in the economic realm, we are witnessing another kind of action/reaction. The U.S.dollar is increasing in value at a very rapid pace when compared to other currencies.
When I came to the southwest about 20 years ago, I could buy 10 Mexican pesos for one dollar. It was a 10-1 ratio; recently I was able to buy 20 pesos for the same dollar – a 20-1 ratio.
The U.S. Dollar gained strength compared to the peso. And, conversely, the Mexican peso became weaker. Are the Mexican people getting ripped off in this scenario?
When their currency weakened compared to the dollar it is probably attracting more financial activity from foreigners. The impulse to travel to Mexico is increased because foreigners will get more bang for their buck.
But here’s the downside to a strong U.S. dollar:
A strong dollar makes things more expensive in the U.S. for foreign buyers. They are able to buy less from America when the dollar increases in value as it’s doing now.
This is not good for American producers; however, America is not a high producing nation but they sure consume a lot from other countries.
Sometimes countries devalue their currency in order to sell more of their products.
Remember when Trump jumped all over China for manipulating their currency and ripping off America? It was true. China devalued its currency on a regular basis, making their products less expensive for American consumption. This hurt American manufacturers.
Trump was trying to protect American manufacturers with his “America First” theme. He wanted to “reshore” manufacturing back to America. Nothing wrong with this. Especially with pharmaceuticals and other strategic items that have fallen out of our control and into the hands of other countries, namely, China. This is another story for another day.
A stronger U.S. dollar has its benefits but it does nothing to protect American manufacturers. On the other hand, imports that are produced overseas are cheaper with a strong dollar and this helps the American pocket book.
So America’s consumers get a boost with a strong dollar but the manufacturers get hurt. A strong dollar cuts two ways.
These currency issues can get complex but it’s important for business people to understand these financial dynamics especially in a global market place.
Now, what if American demand for these imported products drops due to a weaker dollar? Consumers may be looking at higher priced imports.
Is this what is coming our way? I want to explore this and I will but it isn’t easy. Why? Currency transactions are complex AND I haven’t even tried to tie all this into INFLATION!
How does inflation (the loss of purchasing power over time) affect a weaker dollar or vice versa? Or are they connected at all?
Listen, help me out here. I’m not an expert by any stretch of the imagination despite my heart-felt desire to try and understand our world economy.
You folks who are in logistics and working in the global economy – give me some input. Point out the errors in my comments. Go for it. Help me out. If you’re not normally connected with any of this stuff, give me your input anyway.
Look for Part II sometime in the future.