You've got to get Poor to get Rich

The title of this article is borrowed from my good friend, it is his favourite saying. It takes two sides. One is that most people and countries work in order to increase their wealth, ie they desire savings or to be able to buy more goods and services, thus increasing their living standards. The second is that Central Banks believe that a lower value currency on the exchange market is a good thing for the country. By 'good thing' I mean the low currency makes the country better off. However you cannot have your lunch and eat it too. A low currency and a high living standard and high savings (that are able to purchase good and services in the future) are mutually exclusive. You either have a strong and valuable currency that has high purchasing power, or you don't.

Central Banks cite a high currency as a reason to cut interest rates, because in their view it is overvalued. A currency is simply the exchange ratio between goods and services in two different countries. To imply this ratio is overvalued, is incorrect. That is because it is virtually impossible to quantify what the ratio should be. How do you compare the price of a steak in Darling Harbour to a steak in Rotorua? Or a Lexus LX570 purchased from a prestigious dealership in Sydney who offers many extras to that of a dealership in the outskirts of Durban? There are too many factors at play to simply state that the currency is over or undervalued. The Big Mac index is a guide, but there is more to the price of the burger than just the ingredients. Rent and wages are two big factors that need to be accounted for, but are difficult to do so.

The idea that you can lower the currency's value today, thus decreasing the living standards and purchasing power of the citizens and then at some point in the future, this will reverse and increase the living standards and purchasing power is absurd. But this is exactly what the Central Bank is saying when they use an overvalued exchange rate as a reason to cut interest rates. This does assume that the Central Bank wants a prosperous country - this could be debated, as in recent years their actions are questionable and one does wonder who they work for.