Numberscruncher: Economics for Fake Billionaires — Currency Valuation Edition

Written by Current Events, Numberscruncher


Vanity Fair reports that America’s favorite short-fingered vulgarian doesn’t know whether a strong dollar is the good thing to have or a weak dollar is a good thing to have.

The answer is: it depends.

Now, it is not surprising that the average person doesn’t understand how exchange rates affect the economy, because it’s not straightforward. It is surprising – or maybe it’s not – that a wanna-be billionaire and real Wharton grad like Trump doesn’t know that. Wharton should sue to get its diploma back.

An exchange rate is the price of one currency in another currency. Prices of everything go up and down all the time. Whether that’s good or bad depends on whether you are buying or selling. It is no different with money.

A strong dollar means that the dollar buys relatively more of another currency. A weak dollar means that it buys relatively less.

Or: a strong dollar means that it takes more of a foreign currency to buy a dollar. A weak dollar means that less foreign currency is needed.

A strong dollar is good for anyone who travels to other countries or who buys things made in other countries. A weak dollar is good for anyone who sells things to other countries.

There’s another wrinkle, which is that currencies do not move together. The dollar is very strong against the British pound and the euro, but not so strong against the Japanese yen or the Chinese yuan.  Blame Brexit – or thank it, if you are making vacation plans – but the movement of the dollar is not always something we can control. It is as much about what happens in the United States as what happens to the country with the other currency.

In a free market, prices take care of themselves; they are a function of supply and demand. Currency markets are not completely free; governments manipulate the supply and demand of currency all the time with interest rates, bond-market transactions, and other tools. But they do this in the interest of other goals for the economy, such as supporting trade or managing interest rates.

All of which is to say that there is no exchange rate that is inherently #MAGA; there is no one brag-worthy value of the dollar.

If the Vanity Fair story is true, we’ll want to take our strong dollars and buy foreign currency as protection for stranger times to come. This will increase demand for foreign currency relative to the dollar, making it relatively more expensive and the dollar, relatively speaking, weaker. Some presidents in history were that wily. I’m not sure about this one.