I wanted to write a timely article on the effects of a
strong currency. We are currently seeing the Australian Dollar (AUD) rise to
lifetime record highs against the Euro as problems in the Eurozone continue to
fester and investors look for perceived safe haven economies to park their
money. The Australian economy is a very attractive location for capital because
of its stable developed economy, stable political system, relatively low government
debt and is generally business friendly.
Safe haven status takes years to attain but can be lost in few
months. The most recent currency to lose some of their safe haven credibility
is Switzerland, which pegged its currency to the Euro and now has to print
unlimited amounts of Swiss Francs (CHF) to maintain the currency peg. Since the
Eurozone fears lead people to buy CHFs, the Swiss are forced to increase their
money supply to meet demand, which will eventually cause prices to rise as
those newly created CHFs leak into the wider economy.
The economic pundits will tell you that the high AUD or CHF is
hurting domestic industries and jobs are being lost. This fails to recognise
that the fundamental goal for an economy is not to have more jobs but to increase
productivity. Maybe every Swiss person could have worked for 35hrs a week
instead of 40hrs a week since their purchasing power is increasing in EUR
terms. That’s obviously a good thing and helps them achieve a higher standard
of living by making their lives easier and more enjoyable to live.
The Swiss government fell for the myth that a weak currency
stimulates exports. But what they continually forget to mention is the reduced
cost of imports that benefits EVERYONE in Switzerland. There will be changes
that will occur in an economy with a strong currency including job losses since
marginally productive exporters will face greater competition through cheaper
imports. Some businesses will close down but others will become more
productive. The business that closes down will result in job losses but does
that mean the newly unemployed will never work again? OF COURSE NOT! There is
always a productive use for labour in an economy and as long as wages and
labour regulations are flexible, the unemployed will find work elsewhere within
the economy. Maybe new employment opportunities will come from a growing business
reliant on imports that have seen demand rise as their products are now cheaper.
The net result is an increase in the overall productivity of the economy and is
an example of Schumpeter’s creative destruction, where the resources from a
non-productive business are reallocated to a more productive business.
The other point touched on before was that a stronger
currency will benefit everyone since they can buy goods from the rest of the
world cheaply. Exporters may see stiffer competition but they too will see
costs decline if they import supplies or raw materials from foreign businesses.
The Australian economy is a great example of an economy that
has thrived despite seeing a rising currency. This does not mean the economy is
completely healthy because households continue to have high debt levels due to
large mortgages and we are likely to see the property market continue its slow
decline. Australia is also heavily exposed to Asia and if there is a slow down
or financial crisis our economy could be slammed. But things continue to
function and we have not seen our economy die as a result of the strong
Australian dollar. Next time you see the Aussie dollar make a new high, don’t
frown, fist pump the air and shout YOU BEAUTY!
