Observations

I was in southern Florida recently to talk at a money management conference. A participant from Cincinnati, Ohio was having a drink with me and he pointed out how inexpensive real estate was in the area.

“ For $250,000 you can buy a nice house with swimming pool in this area. It is impossible to find such a deal in Cincinnati”, he noted.

What he was really saying was that a dollar earned in Ohio could buy more in Florida. This is exactly what happens when one travels from a strong dollar area to a weaker dollar area – everything is cheaper. Although the US has one currency, there are in fact many “regional currencies” within the US.

When I travel from Akron to, say, Florida I find goods and services to be cheaper. But when I go to Connecticut or New York City, prices are considerably higher. The reason is that Connecticut and NYC are strong dollar regions relative to Ohio.

The problem with a unique currency in a large economic area is that if productivity differentials between the various regions are not small (as in the US), distortions will appear (as in Europe).

Capital goes in the high productivity areas, where added value is the greatest. This problem is particularly pronounced in the European Union where the low productivity countries of Eastern Europe have to compete for capital with the high productivity countries of Western Europe.

If low productivity countries or states had a separate currency, their currency would devalue enough to attract new investments. The problem is that for the same amount of euros why invest in Romania, for example, when one can invest in Germany where the workforce is more efficient?

(This Observation appeared in the 1/27/2003 issue of The Peter Dag Portfolio).

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George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest

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