The dollar index lost 35.8% from 2002 to 2008. Some observers cherish this development because it helps our exports. One way to look at it, however, is that it makes everything we buy from other countries 35.8% more expensive, hurting businesses needing foreign technology.
A more complete way to look at the implications of changes in a currency is the following.
Any economy is the aggregate result of many industries. Make a list of all the industries and stack them from most productive to least competitive in the world markets. Draw a line dividing the two classes of industries. The trend of a currency tells you how many industries are above this line.
A declining currency suggests that most of the industries are below the line dividing competitive and noncompetitive industries. A country with a strong currency has the most important industries above this imaginary line.
Trading partners buy the currency of countries with competitive industries and sell the currency of the countries with noncompetitive industries. If a country has mostly noncompetitive industries, its currency is bound to weaken. Reason? The products of the countries with competitive industries offer more value.
Greece is like the “weak industry” of Europe. Companies would rather do business with Germany than Greece. Germany offers the products and services needed to remain competitive. Greece does not. Money flows away from Greece into Germany or France. Greek politicians focused on developing social programs that appealed to the population. They forgot however to encourage investments in the infrastructure needed to create the wealth to pay for the social programs.
The outcome is that Greece now does not have the money to pay for its accumulated debt. Is the problem going to be solved by bailing out the country? Certainly not, because Greece, like Italy, will find it very difficult to dismantle their social infrastructure. Some states in the USA have the same problems.
It looks like the time has come to pay the piper.
George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked Top Market Timer in 2009 and 2010 by Timer Digest
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