February 19, 2015 Print

Image credit: epSos.de

When the media reports on changing currency exchange rates, they tend to provide a simplistic portrayal of the effects. On one hand, we may hear that the falling value of the ruble relative to other currencies is proving harmful to Russians. On the other, we may hear that central banks in Europe and Japan are actively trying to reduce the exchange value of their currencies in order to boost their economies.

These stories don’t seem to add up because they leave out all the varied interests and dynamics at play in the worldwide economy, explains Jerry L. Jordan, senior fellow of Atlas Network and the Sound Money Project.

“When international terms of trade are altered by foreign developments—wars, agricultural conditions, etc.—there are redistributional effects in the domestic economy: The effects on import-competing firms is opposite to that on exporting firms, and the prices of tradable goods change relative to the prices of non-tradable goods,” Jordan explains. “Furthermore, asset prices are influenced differently than goods prices. If a rising US dollar looks like a good investment opportunity to foreigners, they will contribute to the bidding up of common stock prices, real estate prices and other assets priced in dollars.”

He continues, “In all, many prices are affected, in different directions, with some people being positively or negatively affected relative to other people. None of these developments, though, has any certain effect on the stability of the domestic currency.”

When central banks intervene, they effectively choose who should be the winners and who should be the losers in this world of innumerable changing prices.

Read Jordan’s full analysis.

Learn more about the Sound Money Project.