Americans are hard-working people and understand the power of investing. We now have more households investing in equities via retirement plans and direct investing than not. That is a good thing. In my opinion, the weak link in our understanding of investment is currency exchange. Americans seem to miss that fundamental and required understanding when dealing with the global economy.
We receive many questions about the value America being the world’s reserve currency, if we will lose that title and how such a loss would impact us. The answer is yes, we will lose it but not because somebody else will take it. A unit of any currency will always go to where it is best served as long as it’s allowed to move freely. “Best served” means that as long as regulatory bodies and governments don't get in the way, the change will be a welcomed one and global trade will be better for it.
The topic of global trade is a confusing one for high school economic students, let alone politicians! We seem to always have legislative bodies declaring foul play when things don't seem "fair" (with "fair" usually defined by whether something increases or decreases the likelihood of re-election). The current German economy and America’s response is the perfect example. The situation would be humorous if only the stakes weren't so high.
Germany currently runs the world’s largest trade surplus. That means that the world buys more products and services from Germany than Germany buys from the rest of the world. Simply put, Germany exports far more than it imports. That sounds like a recipe for success but others aren't so prepared to give them a gold star. In fact, our leaders are criticizing Germany for not spending more and for failing to help the world economy improve! Seriously. You can't make this stuff up!
Imagine going to one of your children and telling them they were being too productive and they should rest. Then in the next sentence imagine telling them they really should stop saving for a rainy day and start spending more right now. Spend more now even if borrowing the money is necessary. It's not fair that they are creating more net wealth than their siblings so they should spend, spend spend. Blaspheme! Yet that is exactly what we are telling the Germans from government down to the individual businesses.
The bottom line is that currency valuations are important and most of us don't grasp the magnitude of the situation. When the value of the dollar rises, our ability to buy from other countries increases. Thus imports (think China-made products) become cheaper. That's good news for countries and businesses that export like Germany and China. It is also very good for U.S. businesses that require goods and services made in other countries.
When the value of the dollar compared to other global currencies falls all is not lost! In fact, many of Americas largest companies make more money over seas than here at home. Our exports become cheaper as the dollar falls and many U.S. companies thrive in that condition.
Trade surplus and deficits are confusing. Currency valuations are difficult. We should all strive to save more, make more, spend less and especially borrow less.
Joseph “Big Joe” Clark, whose column is published Saturdays, is a certified financial planner. He can be reached at email@example.com or 640-1524.