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Seriously, how does weakening a currency help exports?

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April 03, 2013 – Comments (19)

Besides the fact that japan had an incredibly strong currency for 20 years while being an export leader, I think people don't understand the difference between cause and effect.  The following is the example I am always given for how weakening a currency helps exports.  I will use incorrect round numbers to make things simple.

Eur/usd = 2

Price of a car in euros = 40k euros

If euro weakens their currency so it is at parity with the dollar, it will now cost 50% less for americans to buy the car (it used to cost 80k to buy 40k euros, now only costs 40k).

Um. how is that any different from keeping the currency the same price, and just telling the car maker to cut his price to 20k euros?

So you either Sell something for half the price and keep your full purchasing power, or sell something for the same price and receive half the purchasing power.  There is no difference.  A lot of people say "yeah but now the dealer can sell more cars and get the same amount of euros!" but if the euro is worth half as much its the same effect as receiving half the price with a currency twice as strong.

I don't know how anybody can believe this crap.  Either that or I am just completely insane and missing something obvious.  To me it is an obvious lie that the central bankers use to justify screwing the public. 

19 Comments – Post Your Own

#1) On April 03, 2013 at 2:50 PM, L0RDZ (78.43) wrote:

Bankers  screwing  people ?

Naaa....    it's not  like  that world bank guy  being accused  of  attempted rape  on  a   house keeping  lady.

Oh wait...  forget I said anything.

It's all just  an  illusion, after  all  what  exactly  is  a  Euro ?

just a  piece of  paper  that  we  give  value  to ?

What if  tommorrow  they  said  your  money  was  worthless ?

Meanwhile  they  are  simply  printing  it  at neck break speeds,  creating  $$$  out of  thin  air  and  charging  interest  on  the  fake  but  somehow  real  $$$.

If  only  we  could  legalize slavery  once  more,  find  people  who  have  huge  debts  and  tell them to pay or  become  slaves...  branded  like  cattle...

 

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#2) On April 03, 2013 at 5:01 PM, JaysRage (88.41) wrote:

That's exactly what happens....and at 20K Euroes, you'll sell more cars than at 40K Euroes, which will mean more exports....

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#3) On April 03, 2013 at 5:43 PM, Valyooo (99.43) wrote:

Well giving away cars for free would export even more of them. How does that help the economy?

 

also why wouldn't the car maker just double his prices to make up for the currency devaluation? If he is happy receiving more orders at same price but cheaper currency why didnt he cut price tag in half when his currency was strong.  Same result 

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#4) On April 03, 2013 at 6:03 PM, awallejr (76.63) wrote:

but if the euro is worth half as much its the same effect as receiving half the price with a currency twice as strong.

Not domestically.  If everyone all of a sudden received a 100% raise I suppose, but that doesn't happen. A Euro is worth the same to any other Euro regardless of its value to other currencies.  So following your example you would be filing BK pretty quickly.

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#5) On April 03, 2013 at 6:19 PM, CCharing (91.40) wrote:

The "obvious" that you are missing is the difference between theory and practice. 

If during today's session the dollar devalues against the euro (and therefore the purchasing power of the dollar erodes and assuming the perspective of an american), your cost of buying groceries aren't immediately higher if you go to the store.  Your next paycheck isn't any more or less.  And if after you get off from your lofty job in high finance and fancy a trip to the nearest luxury dealership - that Mercedes S class doesn't cost any more.

But to a european looking to import poultry, relative to the devaluation, american chicken is now that much cheaper than say chicken from down under.  An american may reconsider a vacation in europe because souvenirs are suddenly that much more expensive, and when the invoice for next year's flagship Benz goes up the dealership may be less generous negotiating down the price and the customer (a well-to-do middle manager-type) might decide Lexus offers better value...

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#6) On April 03, 2013 at 6:51 PM, Valyooo (99.43) wrote:

Yes, domestically. Now any imports or currency purchases you make will cost twice as much. And f you devalue the currency by doubling the money supply inflation will go up 100% and you'll be able to buy half as much domestically. 

 

Its just like conservation of energy in physics. Just simply playing with currency you're gonna have to hurt one segment to help another. There's no net benefit  maybe the s-class is same sticker price, but then the car dealer is getting screwed by receiving a currency worth half of what it used to be.  

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#7) On April 03, 2013 at 7:11 PM, awallejr (76.63) wrote:

Well yeah you are right, on the other hand imports can become more expensive.  That is the trade off and hence many "camps" on the subject.

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#8) On April 03, 2013 at 7:12 PM, Valyooo (99.43) wrote:

Also in practice who's gonna wanna do business with a company in a country if they have to worry about currency risk?

america and Argentina- awful currencies over last decades

 

japan- best currency for decadeswho had the better exports? 

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#9) On April 04, 2013 at 12:41 PM, JaysRage (88.41) wrote:

Well giving away cars for free would export even more of them. How does that help the economy?

It doesn't.  That wasn't your question, though.   A weaker currency most definitely helps exports at the expense of imports and buying power.  Costs of goods overall increase, causing a lower standard of living.    

 

 

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#10) On April 04, 2013 at 3:52 PM, Valyooo (99.43) wrote:

So how come Japan was the largest exporter and largest foreign creditor for so long with a strengthening currency while America was the biggest importer with a weakening currency?

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#11) On April 04, 2013 at 4:06 PM, L0RDZ (78.43) wrote:

Thinking  Japan  is   strong  ?   is  a  serious  mistake...

If  they  are so strong  than  why  have   their  economy  been surpassed  by  the  Chinese  ?

Why  has   their stock market  tanked and  gone side ways  for  so long ?

Japan has been   QE ING  for  so  many  years  that  you  can  say  they  are  so  accustom  to  negative  interest  rates that   it  doesn't  seem  to bother  anyone  at least  in  Japan..

Meanwhile  like a loaf  of  bread will cost  you well  over  ten american  excuse me  us  dollars  in  many  cities  in  Japan.

Please  Japan  gonna  tank...   Given  all  the destruction  that  the  tsunami  and  nuclear  reactor  melt  downs  have  done ?  why haven't  there  been   greater economic  numbers  from  Japan ?

I'll give  them credit that  they are much better  rebuilders  given  how  long  it  has  taken  the US  to  construct  upon  our 9-11  site.

Meanwhile  in  Japan  many areas previously  devastated  have been  rebuilt.

Japan  has  had  twenty  years  of    deflation   and  is  copying  what  the  Fed  is  doing  to  try  to reflate  its  blown  tires.

Interesting it  seems  like  its  working at least for  owners of  Japanese stocks.

 

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#12) On April 04, 2013 at 4:52 PM, Valyooo (99.43) wrote:

I did not say Japan was strong. I said they lead in exports and foreign crediting while having a strong currency for decades.  Look at the USDJPY chart over the last 20 years up until november.  Deflation, exactly my point, that deflation coincided with exports, not inflation.

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#13) On April 04, 2013 at 5:39 PM, L0RDZ (78.43) wrote:

Valy ???  Japan  has  been   the  front  runner  for  a  stock  market  crash  if  you  remember  your  history  look at  how badly  the  Japanese  market  crashed ?  well before  any  Us / world stock market  crash.

Their  businesses and  loans  were  front  runners to  Enron's  and  all the mortgage  bad  business  loan  defaults,

Instead  of  taking the pain  and  moving on... the  government  bailed  them all out  and  caused  like 20-30 years of  pain.

Remember back in the  80's  when everyone was worried they'd  take  over  the world ??  why do you think that never  materialized ?

Also  Japan  has been  surviving because  they  don't  have to pay  for  a  military to protect them,  in  fact  by  their own laws  they  will never  have any type of  offensive military...

Hence  they have  saved  multiple  trillions  in  Yen ear marked  for  domestic  spending  ~  instead of  being drained to arm  a  military  industrial  complex...

Hence  we  have  subsidized  and  protected  Japan,  we  still  do...  we  spend billions  to protect Japan  as well as  many other countries.

Also  Japan  has  had  purposefully  manipulated  its  currency to  support its economy  and  make  its  exports  less costly  for  other countries.

Meanwhile  Japan has kept  barriers up,  just ask anyone trying to sell American  beef  and  or  poultry  or  pork...

So if  you say  Japan  is  not  strong ??  but  Japan  currency is strong...

I'll sell you a  nice bridge  on  prime  building  floridian swamp  land...   just saying ?

What  the heck are  you really saying ?

I wouldn't  look  to Japan  as any world  leading  country or  fixer...

They are  trying  to  sell  40 year  bonds  at  1% and sadly their  population probably  will buy up all  the 40 year old paper..  if not  they'll do like  the feds... and buy it up themselves...

So they are gonna double  the money supply  ~  out of  thin  air  to  beg  that inflation  occurs...

Rather than fix  the hole  in the  tire...  they are gonna  simply keep pumping air...

Japan is not  strong...    they are weak... they couldn't  bust a  grape  in a  wet paper lunch bag...

If  the US  was to suddenly stop supporting  them militarily  and  let  it  be  known  world  wide...   you'd  see  new masters  in  Japan...

Chinese...  masters....

Maybe  even  Korean..

 

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#14) On April 04, 2013 at 6:01 PM, Valyooo (99.43) wrote:

I'm not talking about their economy. I'm talking about their currency and their exports

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#15) On April 04, 2013 at 7:50 PM, chk999 (99.97) wrote:

CCharing has it. When you are an exporter, most of your costs are local (labor and local materials), but your sales are foreign. So devaluing your currency means your costs don't change much, but your stuff is now cheaper to people in other countries, so they buy more of it. And imports are now more expensive, so you buy less of them.

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#16) On April 04, 2013 at 8:22 PM, ETFsRule (99.92) wrote:

A hypothetical example:

At Eur/usd = 2

Price of a car = 40k euros

Cost to produce the car: 35k euros

Profit per car: 5k euros

Cars sold per year: 1000

Profit per year: 1000 x 5k = 5 million euros 

Now, at Eur/usd = 1

Price of a car = 20k euros

Cost to produce the car: 17.5k euros

Profit per car: 2.5k euros

Cars sold per year: 10,000 (everyone wants your cars now because they are half the price of equivalent American cars)

Profit per year: 10,000 x 2.5k = 25 million euros

Basically if you devalue by 50%, you need to increase your sales by at least 100% in order to come out ahead, after accounting for the devaluation. And that's what happens.

If that seems unrealistic, consider the fact that China's exports have grown by about 20000% over the past 30 years (from around $1 billion to $200 billion).

http://research.stlouisfed.org/fredgraph.png?g=hb3

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#17) On April 05, 2013 at 9:57 AM, Valyooo (99.43) wrote:

It still doesn't make sense to me, it is like saying 4+2 is better than 2+4, it does not matter if domestic prices dont change, their currency is still able to buy much less on the whole, and looking at currency wars of the past, it seems that the massive printers (Weimar republic, brazil, argentina, zimbabwe, USA) have not been massive exporters, while the countries with stronger currencies (japan, hong kong, etc) export a lot, so it doesnt seem to work in real life

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#18) On April 10, 2013 at 12:08 AM, CCharing (91.40) wrote:

but some countries don't care about losing purchasing power in the interim.  China pegged the Remingbi for a reason, etc.

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#19) On April 10, 2013 at 12:24 AM, CCharing (91.40) wrote:

The relationship holds true, its just not so drastic.  

If japanese yen weakens then the volume of jap. exports does rise (which we will soon see), but just because the yen is strengthening doesn't mean people suddenly eschew all japanese goods.  The fact that japan is such a 'massive' explorter is the main reason why its currency has been so strong.

It's not as linear as "a 2% increase in the strength of the yen over the last quarter correlates with an immediate 2% decrease in exports this quarter."  

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