More on this whole currency war issue. I still don’t understand the strong desire by the US to devalue its currency, and force the China Renminbi’s rise. While some quarters in the US think this is going to magically create hundreds of thousands of jobs, my view is very different. I think it won’t. And in fact, the devaluing of the USD will only hasten US’s economic decline relative to China, and relative to Asia as well. Just look at the United Kingdom. The British pound was at its strongest when UK ruled the commonwealth and over half the world. Today, the pound is a shadow of its former glory, and the same can be said for the importance of UK in the world.
In today’s inter connected world, no man is an island, and that goes for nations as well. If US thinks that it can somehow only export stuff, and stop importing stuff because it devalues its currency, it is badly mistaken. People buy your stuff if they want them, price is only one of the factors that come into it. The German pound ( and the Euro) was very strong right up to the Euro financial crisis, but that didn’t stop German car makers from competing right at the very top with Japanese and Korean car makers even as US car markers continued to lose market share. Look in Singapore, where cars from all countries are being sold. (We have no national car company of our own). The Mercedes and BMWs are the most popular cars right after Toyota. Even Hyundai and Kia cars are now becoming more popular as well, and its not just because the Korean won is cheap, its also because Hyundai and Kia now make good cars.
Ultimately, because of the flow of goods and services all over the world, countries which are gaining in economic power will still see it happen regardless of what happens to their currency. The average Chinese worker in China is still going to be cheaper than the average worker in the US even if the USD gets devalued another 20% against the Renminbi. And the US imports a ton of stuff too. So, if it gets its wish, then it is going to see the things it imports get a lot more expensive. Not everything can possibly be made in US, and some things will see demand regardless. The end result is that they will see US standard of living fall simply because the purchasing power of the US dollar becomes that much lower as the USD devalues. We are already seeing commodity prices resume their rise with the weakening of the USD. How much less commodities can the US possibly consume?
Another thing US perhaps did not consider is a reverse brain drain. US has benefited in the last few decades from a lot of talented scientists, professionals going to US to work and live there. The strength of strong purchasing power of the USD also had a part to play in this. It made it so attractive to live in the US that people were willing to leave behind family, friends, etc to travel thousands of miles to a foreign land to make their living. If this trend of the USD devaluing continues, there will be a reverse brain drain, and this will include skilled and talented Americans as well. In the end, if we look into history, I have rarely seen a situation where a country that finds its currency devaluing significantly over the years actually finds itself better off because of it.
On another note, this has been a flat week, but this doesn’t change my bullish view on equities. It is very common for stock markets to go through such smaller cycles even within the midst of a medium term uptrend. I would see any potential correction or dips in markets at this point in time as opportunities to buy. As always though, be careful not to get too greedy, so if you find that rising stock markets have caused your equity holdings to rise above what you are comfortable with, then take profit now and then so that you have the confidence to stay in the market in spite of its volatile cycles.
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