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Katchum
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Albert Sung is the author of Correlation Economics, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at Ashland, a... More
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Correlation Economics
  • Strenghth In Currency: A Good Thing! 3 comments
    Feb 23, 2012 12:21 PM | about stocks: FXY

    Today I was thinking about the yen dropping against other currencies. Mostly, such things happen when governments print money. But also when countries post deficits in their current account balance.

    The mechanics are as follows:

    A country exports stuff to other countries and receives money in foreign currency. Let's say Japan exports Playstations to America and receives US dollars. Japan will of course want yen, and will exchange those US dollars into yen so that they can buy things with yen in their own country Japan.

    If Japan exports more to the US as the US exports to Japan, then more money will flow to Japan than to the US. So more US dollars flow to Japan as yen flow to the US. Which means more US dollars need to be converted into yen, which makes the yen rise.

    Conversely, when Japan has a trade deficit, like today, then the yen will drop against other currencies out there. So basically you want your currency to strengthen, which indicates that your balance sheet is improving.

    Strength in currency:

    Strength in currency has other positive effects. If your currency is higher than other currencies then you can buy more stuff. Let's say the oil price is $US 100/barrel. If the yen goes up against the US dollar, the oil price is still the same, but Japanese people can buy more oil, which means their import costs go down, which is good for their balance sheet.

    People will say though, if your currency goes up, you will export less. I think this is a complete baloney! When your currency goes up, you can always reduce the prices of your goods that you sell to foreigners. You will have less revenue (because you sold for a lower price), but your currency went up (which means you didn't lose any money). You will still have the same real revenue as a company, currency adjusted. Of course, when you reduce the price of your goods sold, you should also reduce the wages of your employees, otherwise costs will go up. But the employees shouldn't have a problem with this, because they still have the same buying power as their currency just went up against other foreign currencies. And if they had money in the bank, that money just went up in value against other currencies.

    Generally, companies will benefit though, because their import costs went down due to a strenghtening currency.

    Conclusion:

    When your currency goes up you will always benefit:

    1) You can buy more stuff (oil, food, gold...)

    2) Exports will NOT go down as you can always reduce prices of your goods sold, and reduce wages of your employees. Import costs will go down as the currency went up against other currencies.

    3) Employees aren't affected as their reduced wages are compensated by a higher currency. Their buying power stays the same.

    4) Savings in their own currency will appreciate in value.

    I would love to have a discussion with anyone who doesn't concur with this thesis.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: FXY
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Comments (3)
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  • tornillo57
    , contributor
    Comments (50) | Send Message
     
    I agree, but in practice it seems it isn't that simple.

     

    Take China for example. China's annual GDP growth has been fluctuating between 6% and 14% for the last 20 years. That's real growth! They're the second world economy now. They aparently have a very good balance sheet. But the yuan has only apreciated like $0.03 in 5 years. Seems like the chinese government doesn't like it to appreciate.

     

    Take Japan. They do the impossible to devalue their currency. They're the kings of money printing. Their debt/GDP ratio is sky high, but still, they keep printing because they rely on exports.

     

    Right now, there is a currency war on the whole planet. So, the quetion remains...

     

    If it is so good to let your currency to apreciate, why everybody is trying to devalue their own?
    28 Feb 2012, 01:14 PM Reply Like
  • Katchum
    , contributor
    Comments (532) | Send Message
     
    Author’s reply » The Yuan went from 7.6 to 6.3 against the dollar in 5 years, that's a lot. Almost 20%.

     

    I also don't understand, why governments want their currency to be low. Maybe because it keeps people happy, because they will see their wages go up. People will not blame government when food, oil goes up. But they will blame government if their wages go down, or they become unemployed, because their wages are too high. And that's what government is afraid of.
    28 Feb 2012, 02:13 PM Reply Like
  • tornillo57
    , contributor
    Comments (50) | Send Message
     
    That's the point, 20% may be too little. Percents can be deceitful.

     

    Compare China's growth vs renminbi apreciation. Going from 0.12 cents to 0.15 cents in five years does not seems to correlate to their GDP growth, solid balance sheet and trade surplus.

     

    So yes, I agree with you on the theory, and we can argument that there's a psychological effect on the public that may favor devaluation over apreciation, or that there is corporate influence over politicians to favor devaluation, but still... by judging the actions of countries around the globe, it seems that having a lower currency really helps exports. That's why I say it isn't that simple in practice. We have some missing parameters in the equation. That's why I want to read currency wars from James Rickards, to have a better understanding on the matter.

     

    Of course that reducing the buying power of the middle class has other consequences, but that's another story.
    29 Feb 2012, 03:15 PM Reply Like
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