AvgMarighellaEnjoyer [he/him,any]@hexbear.nettohistory@hexbear.net•It is impossible to understand the current existential threat the US feels from China without first understanding what happened to Japan 37 years ago.English
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2 years agoHigher currency value is bad
this is because a currency that’s too strong will kill your local economy. it becomes cheaper to import anything rather than produce stuff at home.
the inverse is also true: if you have a currency that is disproportionately weak it will make exporting much, much more lucrative than selling your commodity to your domestic market, so you might have a country that produces a lot of a commodity but whose population doesn’t have access to that commodity.
idk if that helped
kinda. i know that in my country if you’re gonna do business with a foreign company what happens is that you send the money to that company in our local currency (brazilian reais) but it doesn’t actually go to that company in reais, the central bank is responsible for making the conversion from reais to dollars and i think the central bank from the company that is receiving the money does the same thing, making the exchange from dollars to their local currency. so, in practice, the local market is pegged to the dollar and every commodity’s price is dictated by the global market.
what this means is that generally speaking you need to weigh local labor costs and the exchange rate when deciding if you’re gonna buy a commodity from the domestic market or if you’re just going to import it. using my own country as an example again, Brazil has been rapidly deindustrializing - not that we were ever an industrialized country - because of our lackluster technological development, our somewhat strong currency and labor costs (these last two haven’t been true for the last few years but still) makes it so it’s almost always cheaper to import something from China rather than producing or buying it here.
now that our currency has weakened meat and oil prices soared even though we are the largest meat producer in the world (i think) and are self sufficient or almost self sufficient in oil production, because it’s more lucrative to sell it abroad than to sell it to the local population.
so, to give some examples:
a) strong currency
say you want a sheet of steel or whatever. let’s pretend that the raw materials are priced the same everywhere for the sake of simplicity.
a brazilian worker and a chinese worker make each $5/hour. for whatever reason the local unit of currency in Brazil becomes more valuable and becomes equivalent to the dollar. the chinese currency didn’t fluctuate. suddenly, even though the only thing that might’ve changed is the exchange rate, the brazilian worker makes $10/hour and the chinese worker still makes $5/hour, despite their pay having not changed in their local currency. as labor costs are embedded into the price of a commodity, the chinese-made commodity will have become cheaper in comparison to the brazilian-made commodity.
this can be overcome with State planning and intervention, but as most national governments are sleepwalking neoliberal zombies most will let the market dictate their fates.
b) a weak currency
let’s now pretend that the real is pegged to the dollar. let’s say oil is a dollar a barrel. if the brazilian currency shrinks to 1/4 of its value, suddenly the cost to produce a gallon of oil becomes a quarter lower. because of that the oil producer can sell it to the global market at a higher profit margin than selling it domestically. this causes domestic prices to go up even though productions costs might not have increased and there’s no need to import oil.
obviously i grossly simplified a lot of what goes into the price of a commodity but this is the easiest way to try to explain how the exchange rate affects a country’s economy and its trade balance. both of the examples i gave are based on the actual brazilian economy. i hope the examples are intelligible, i don’t write that well so sometimes my posts can be confusing to read. either way, if you still have questions or didn’t understand something i’d love to try to help you.