Why does the value of currencies matter?

The value of currencies and exchange rates can have a massive effect on the buying power of individuals, institutions and firms. This value is mostly a function of supply and demand, because of this, your physical location plays a large role on the value of your time and work. During the industrial revolution, there were plenty of factory jobs in the United States, However when you look at employment today, these jobs make up a tiny portion of the economy. As a country creates more value and becomes more stable, the demand for its currency goes up, which, given a constant supply, will increase the value of the currency. Now, it doesn’t make sense economically to perform some functions in The United States, i.e. manufacturing. These jobs get moved off to countries where their currency is worth less so that business can maintain their profits. On the individual level this can be devastating in countries like the United States where jobs are being lost. However, on a system level the international community as a whole is benefitted by this phenomenon by a reduction in poverty and a raising of the overall material standard of living.

The government and central bank can also influence the value of currencies by setting interest rates and having the ability to increase the supply and lower the value of each individual unit. The fact that the government and central banks have this power, means that they will most likely at some point, abuse or otherwise misuse this power. Monetary policy is a powerful thing, when the value of a country’s currency is low, this promotes foreign investment. People who live somewhere with a higher valued currency can essentially buy everything on sale, real estate is cheaper, as are labour, and manufacturing. This encourages global companies and investors to get more for their money just by spending it internationally. The problem for governments is that this growth is not infinitely sustainable. The more foreign investment, the more the value of the currency will rise which will make future foreign investments less lucrative.

This is where the motivation for a country like China to artificially devalue their currency comes from. They are developing fast and benefiting greatly from foreign investment. In the short term this will produce faster growth, as seen in China’s quick rise. In the long term however, a strategy like this creates imbalances in economies. Some believe that China has already started to feel the consequences of these imbalances. and that their economy has actually started to stagnate, this may be demonstrated by a slow in growth rates. However, these slowing growth rates could also mean the country’s economy is maturing. No one expected the meteoric rise to continue indefinitely. The current cost of labour in China allows room for other poorer countries to fill these rolls and grow their economies, countries like Africa will be the countries to watch over the next 10–20 years to see fast growth.