Is an exchange rate like a national share price?

If currency depreciations are like diabetic shocks, then high reserves are must be the pancreas of the system. At least that is how many 3rd world countries have defended themselves from the hedge fund attacks and financial crashes so common in the 90s.

It’s all a game and it’s rigged. 1st worlders did not want to recognize this because they were the beneficiaries of the system. Things are changing now. The rot is reaching the core.

One complication with the blood sugar analogy is that different constituencies within a country might see the “right” level as being different.

So, the wealthy might want a strong reserve currency with buying power overseas, whereas people working in an export industry with foreign competition might like a weaker currency.

Maybe this also happens in physiology (the liver and pancreas disagree?) I have no idea.

Rich and powerful countries are diabetics overindulging on cake whereas the poor are hypoglycemics having to skip meals.

… for heaven’s sake try to keep it less intolerably mindless than …

Gimme a break. I strongly believe that a majority of your audience is American (or United Statesian if you want to be picky). Don’t you have any idea what it means to be American? Intolerably mindless leads the list fer cryin’ out loud. Talk about pissin’ into the wind…

Are stock prices not exchange rates though? They are a ratio of a share to a unit of (interest bearing) currency. Then it is less clear that a rising stock price is unambiguously good. If you are going to receive currency in the future and then plan to buy stocks (e.g. a pensoin), rising stock prices are certainly bad. Just an interesting way of looking at things.

A useful way for me to think of exchange rates (beyond the ‘voting machine’ popularity contest phase) is as a language dictionary. One tribe does all their internal communication about supply and demand, working out what to produce and how to trade it, via ‘frobnitz’. Another measure the same commodities and similar processes in ‘splats’. To the extent that tribe one wants to exchange the things that are relatively more difficult for them to produce with those that are relatively difficult for tribe two to produce they have to have a way to translate frobnitz to splats in a way that roughly equal frobnitz-splats quantities go each way.

For my own requirements I try to always have a few of both frobnitz and splats on hand.

I think a thermostat is a good metaphor.

A good metaphor is nice in a work of literature. Such as a poem.

But in technical subjects very dangerous, as always misleading unless the audience understands the subject. The big problem with economics is most people have no clue and that is exploited by unscrupulous politicians. Mainly right wing ones.

I for example think I understand gravity waves as I read about General relativity on Wikipedia after the announcement of their confirmation. But I cannot be certain as the Lorenz transformation and other maths is not easy to follow. Which is why it took Albert Einstein ten years to work it out. I am willing to take his word for it however. He also helpfully explains that Socialism is the answer to all other problems; always useful to quote that if needed!

The “socialism”/dick-drug thing hasn’t been an issue for several years.

there are always one fewer exchange rates than there are countries

Actually, there are always one fewer exchange rates than there are currencies, which is less than the number of countries, since some countries have the same currency. Example: France, Germany, Italy, Netherlands etc all have the same currency, the Euro.

“or whether it would be good for the UK if the Chinese yuan appreciated”

For the “UK”? The whole point about exchange rate movement is that they favour some people and hurt others. Yet another case of an inappropriate collective (which seems to be the #1 logical error in political rhetoric).

Actually I’ve just realised that there’s a good analogy with weather: pressure.

Absolute pressure doesn’t matter much, and always returns to average, but changes in pressure come in “fronts” bringing warm or cold weather with them. Sufficiently dramatic changes produce damaging weather like hurricanes. So the currency dropping on bad news is an “exchange rate front”: weather blowing in that causes short term disruption.

With regards to @P. O’ Neill, et al., am I wrong in thinking the real objection is the way calling exchange rates a country’s “share price” is the way it lets capitalization wear the crown of patriotism and to falsely naturalize the belief that what is good for capital is good the economy? The blood sugar analogy is an attempt to move the emphasis from “high” to “stable”… does the weather analogy tell people “it is best that it has alternating periods of cheapness and dearness”, to worry if it doesn’t change (but regularly)? Even if it tries to awaken people from capital-fundamentalism will it make people look to good indicators?

@A H: Do companies depress dividend payments to increase sales? It depends on the metaphor you want I guess, but the problem is that’s not what people take from ‘share price of our America, Inc.’ because they also don’t know how that actually works. The ‘smartest guys in the room’ sure know, but…

It is after all so much easier to sell a tariff than a currency devaluation to the economic patriot.
But if a national currency is the right to buy stuff in a country isn’t the exchange rate is the just price of buying that right? So some countries have low exchange rates because they want to export. When the Chinese do it it’s called ‘dumping’ isn’t it? In contrast, Japan’s industrial policy wonks have got people to call an overpriced currency endaka fukyo, an ‘expensive yen recession’.

In short, we call it a ‘weak pound’; Do we need to call it anything more metaphorical than ‘cheap money’?

PS
@Ronan, speaking of Indyref, rather than Brexit, I have been experimenting with the word ‘petrocurrency’ to convince the English that Scotland leaving is a good thing in a way that the pound sliding is also good. It doesn’t work.

@Pete, I feel like the anglosphere hasn’t discussed the “current account deficit” seriously since they called it the “balance of payments”.

There is something missing in the above comments. Exchange rates should in the LR move toward the relative prices of goods IN INTERNATIONAL TRADE. It is entirely possible to have a country that is quite rich in material terms but which does not trade much internationally. Its currency might be weak because nobody wants it since there is nothing to buy with it. The people in this country might nevertheless all be eating three square meals a day, dress well, have great health care and schools, and a wonderful cultural life shared by all.

There is an inherent fallacy in imagining that the “share price” of a country is only high when that country sells stuff that foreigners want to buy. It aint so.

You can only control a thermostat exactly as long as you have enough fuel.

As noted above, the fundamental problem with the share price metaphor is that it’s generally agreed that higher share prices are better (or at least that higher prices are the goal – there’s never been a CEO who said “if we all work really hard we can cut the share price by 20% this year”) but that’s not true w/r/t currencies.

One of Matt Yglesias’ more useful thoughts was that the strong/weak language used of currencies was problematic because of the natural assumption that strong is better. Whenever I teach this stuff, I always have the class work through a number of examples to see how exchange rate fluctuations impact various groups. The class is always surprised to find the many (including such examples as “my friend who owns a B&B in South Dakota”) who benefit from a weaker dollar.

@34
Seriously?
I think you’re reading the challenge incorrectly. The US is blessed to have the reserve currency for every commodity on the planet and has issued a monetary supply that dwarfs all others. They may export less than they import but the total value of trade that is conducted in dollars is orders of magnitude higher than everything save the Euro and the Yuan. Indeed one could argue its the only currency that is always desired regardless of strength.

I’m not sure there is an example unless its something like the Uzbeckistani Som which is a massively weak currency, but it hardly matters since business is readily conducted in dollars or rubles.

Ive had a similar issue as Antoni

Lupita @35
“The US? It imports much less than it exports. Despite that, people eat and dress well. Schools are so-so for a wealthy country, which is good. As to a wonderful cultural life, maybe if you include video games and Netflix? Then there’s health care. Well, let’s leave it at four out of five.”

It imports much less than it exports? Do you mean dollars or goods and services?

@reason

I meant goods and services. Even if Trump were to win, take protectionist measures, start charging allies for military services, and crash the dollar, the US could still maintain a high standard of living. As Steven Kyle noted, a nation does not necessarily have to export a lot and have a strong currency in order to have a high quality of life. Neither does it necessarily have to be a world hegemon with the world’s reserve currency. Another world is possible.

Coming to this late, but I’ll add a vote for a thermostat in a house.
Not sure it’s better than blood sugar, but maybe it’s clearer that “right level”/”chosen level” isn’t as freighted with moral judgements (unlike diabetes/obesity).

As for the “share price” metaphor, definitely dangerous, there’s already a strong existing tendency (from the 1970s?) to view a strong pound as inherently a good thing.

Lupida,
the US imports much MORE than it exports, and has done so for a long time (i.e. you had it 100% wrong). It can do that because the rest of the world likes to hold dollar denominated assets. This tends to push down US manufacturing wages, so it is not a good thing for all Americans (although it is good for some because it makes imports cheaper).

Daniel Davies is correct to reject international exchange rates as some sort of national share price, though I don’t entirely agree with his logic.

First: monetary prices are themselves ratios, namely of the share of goods per unit currency, or vice versa, e.g., litres per pence, dollars per pound, dozen per Euro, etc. The specific ratio depends on the (market) valuation of the good, and of the currency.

Bartered exchange would reveal an underlying price in terms of ratios: oranges/apple, plumbing services / yard of cloth, etc.

So yes, international exchanges are ratios, because prices are ratios.

But they’re not stock prices. On several grounds. One is that national (or other) currencies aren’t a metric of the relative future prospects of nations / central banks, but of expectations of control over currency in future. Relative to market demand.

There’s also the slight hitch that joint stock corporations don’t engage in trade in terms of their own stock. While I may, say, buy shares in Tesco, I don’t have to tender them in exchange for my groceries whilst shopping there. Or Volkswagen, or Daimler, or British Airways. Corporations only rarely broker their own trade in terms of stock. Most often when buying or trading one another (e.g., a cash+stock swap in a corporate buyout), far more rarely in exchange for goods or services (usually limited to cash-starved start-ups). Though making this the case might be an interesting thought experiment.

As for role of money — blood sugar strikes me as the wrong metaphor, though it’s close. The main problem I have is that sugar is itself a factor of production. Money isn’t, it’s an information flow (literally: “pricing signal”). Biological analouges might be hormones or electrolyte balances which themselves mediate the exchange of nutrients, uptake of waste products, and overall levels of metabolic activity. Analogs on a broader sense, between individuals in a population, or of populations or species (in ecology) are harder to establish. Arguably, economics is in this sense the development of mechanisms for external signalling of deficits and surpluses in exchange.