Additional Math Pages & Resources

Tuesday, September 28, 2010

I'm weaker than you are!

"I'm weaker than you are!"

This is not the kind of taunting you normally hear at an elementary school. But it's being shouted constantly around the globe as grown-up kids engage in a playground game called The World Economy Currency Wars.

"You're too weak! Too cheap!" We shout back. "Our citizens buy your products instead of our own! Get stronger or we'll put up barriers to keep you out!"

Of course, how you respond to this teasing depends on the team you play for. The finance minister of Brazil recently called everyone else a cheater. He said countries all over the world are meddling in currency trades, in order to lower their own money against everyone else's money. Why? It makes their exports cheaper and more appealing in world markets. This trick tends to strengthen the local economies of exporting countries with low exchange rates.

The problem is, not all countries can have the lowest rate of exchange at the same time! Why? Because we are comparing ourselves to each other.

(Remember Lake Woebegone, where the women are strong, the men are good-looking, and the children are all above average?)

Japan, Taiwan and South Korea have taken action recently to weaken their currencies against the dollar and the euro. The prices of their products were high compared to China's prices. China hasn't done much to let the renminbi float, despite constant complaints from the US. If it went down faster, Chinese products would cost more in the US, and US goods would be cheaper in China.

Only one small problem - if the renminbi went up, then Japanese, Taiwanese and Korean products would appear to be cheaper. Would we switch to buying their stuff, or would we buy more US products?

While we've been jousting with China, we have also let the dollar fall 25% against Brazil's real, thus imports from Brazil (sugar, oil, etc) are no longer competitive with our own products. Travel in Europe gets more expensive for Americans because our dollar is weak against the euro or the pound, but that's ok with our government because it makes our aircraft, software, etc.  cheap for the Europeans to buy.

This is all too confusing without some facts. Facts that real people can easily interpret with the math skills we learned in school.

How can we measure the dollar versus the other major currencies? By plotting the exchange rates over time. These little charts are generated by Google, using data licensed from Citibank. Just go to the search line and type in dollar vs yen to see for yourself. By the way, you cannot order currency or traveler's checks using these values; they are just for comparison purposes.

In order to win the The World Economy Currency War game, you want the blue line (the value of your country's money) to be lower at the right side of the chart (today) than it was at the left side (5 years ago). Got it? Here we go:

Dollar vs Brazil Real         
(we're down a huge amount, which means Brazilian products are now too expensive)

Dollar vs Euro                  
(volatile, but no clear winner at the moment)

 Dollar vs British Pound   
(we're losing versus the British)

 Dollar vs China Renminbi
(gosh, it looks like we are winning this one, why are we complaining so much?)

 Dollar vs Swiss Franc       
(doing ok against the Swiss)

 Dollar vs Japan Yen         
(we are winning, but since we export very little to Japan, this just makes Japanese products expensive and uncompetitive compared to China & Korea)

Dollar vs S Korean Won   
(we are losing here - notice the surge in 2009? it's why Korean cars have been inexpensive in the US)

Dollar vs Russian Ruble        
(we've kept ourselves close to parity with the Russians)

It would be only fair to present how things look to Mr Mantega, the Brazilian finance manager. Here's the Real compared to other currencies. Notice the lines are all going up! No wonder he's complaining.

Real vs Dollar                     

Real vs Euro                       

Real vs Ruble                     

Real vs Renminbi              

I'm no expert on foreign exchange, but it looks like the Brazilians aren't playing "I'm weaker than you are" as effectively as the rest of us are ... they have become the strongest country on the playground!