I'm currently reading Currency Wars by James Rickards. In it, he says that one way for a nation to boost its exports is to depreciate its currency by printing money. For example, let's say that the price of a German car is 20,000 marks or 20,000 US dollars. And let's say the exchange rate is 1:1. Then, the German Bank depreciates its currency so that the exchange rate is now 2:1. This means that the price of the car will now be 20,000 marks or $10,000 US. This means Americans will buy more German cars, and the Germans will therefore see a boost in exports.
Here's my problem. Why did the exchange rate go to 2:1? I know the German bank printed money, but what's really happening here? The real reason the exchange rate went to 2:1 is because people value it half as much. And why did they? Wouldn't it be because it now takes twice as many marks to buy the same goods as a US dollar? In other words, the exchange rate went to 2:1 because goods prices in marks have doubled relative to US dollars. Why else would the exchange rate be 2:1?
So, in our example, this means that the German car would actually have been priced at 40,000 marks and $20,000. The price of the car didn't fall for Americans, but simply rose for Germans (at least for those who saw the new money last).
I therefore don't see how depreciating a country's currency will help its exports. In fact, I only see the opposite problem, if anything.
After doing some research, I haven't been able to find any explanation that makes sense to me. Although it does seem like I'm not taking everything into account.
Perhaps this will help?...
Thank you, it definately made the most sense from what I've read so far. I'm still lost on a few things, though. I guess my question would be: how can there be gains from investing in a strong currency, or losses from a weak currency? Basically, how do floating exchange rates work? Lol.
Jesse Cohen:Thank you, it definately made the most sense from what I've read so far. I'm still lost on a few things, though. I guess my question would be: how can there be gains from investing in a strong currency, or losses from a weak currency? Basically, how do floating exchange rates work? Lol.
The reality is, there can be gains and losses from basically anything, because
a) preferences are always time-dependent, individual, and subjective
b) the Efficient Market Hypothesis is bunk
So, in the real world, there will always be profit and loss opportunities. You could invest in a strong currency and post losses, and invest in a weak currency and gain. It all depends on when you get in, when you get out, how you get in and out (e.g. what your method is, what your position is, etc.), and what exactly you consider "success" (i.e. what exactly you're trying to do.)
Basically there is always going to be arbitrage opportunity between currencies. But ultimately, yes, prices do end up reflecting the market values. They're always tending to that direction.
If you want a mainstream look at this, there's a new show on CNBC called Money in Motion that focuses specifically on currency trading. They even advertise that they have "currency class" videos to teach the basics. You might check those out:
Thanks, I will check that out. Pages 34-35 of Rothbard's What Has Government Done to Our Money really helped, but I wish it was more thorough. Thanks.