A Call for Power

It has been well-established that the creation of money, in and of itself, does not stimulate economic growth. In order to stimulate the growth and quality of life of a population, output or production must increase. There are two ways to accomplish increased output. The first, which is widely accepted today, is lowering taxes. A lower tax creates more incentive to invest and work because you get to keep more of what you make. An incentive to work and invest will increase output. The actual increase in the money in consumer’s hands is irrelevant in this eventuality. More money held by all is called inflation. Inflation simply increases prices and does nothing to output. It is the motivation to increase output based on larger expectations of return that is fulfilled by lowering taxes.

The second, and more controversial method of stimulating output, is an investment in the “business.” For example, a few years ago, McDonalds reported losses for the first time in its celebrated history. In an attempt to rectify this, they decided to reinvest in existing stores. Previously, they had been throwing money at developing new stores and neglecting existing infrastructure. By cleaning up the image, products, and business model, McDonalds quickly returned to profitability.

How can the U.S. invest in their ‘existing stores?’ The answer, as has been danced around in Congress, is infrastructure improvements. The determination of what investment will obtain a satisfactory return is the catching point. Democrats want to invest in museums and Republicans don’t seem to know what to invest in. Some have the idea of the great public works projects of the depression era. Personally, I would like to see the day the un-employed, former Lehman associate joins the road department, but I do not think this is necessary today. What we need today is a very large investment in nuclear power. If the intent is to wean ourselves from foreign oil (which is going to happen whether we want it or not), we need to begin to increase our ability to produce energy. As sunny as it is in Arizona, and as windy as it is in the mid-west, we need a real solution to energy, and nuclear is the one we have. This will take a herculean effort, however it is a solution that addresses both infrastructure improvement and national security.

Henry Ford on the Value of the Dollar

Henry Ford understood the implications of the falling dollar during the “Roaring Twenties.”

“But money should always be money. A foot is always twelve inches, but when is a dollar a dollar? If ton weights changed in the coal yard, and peck measures changed in the grocery, and yard sticks were to-day 42 inches and to-morrow 33 inches (by some occult process called ‘exchange’) the people would mighty soon remedy that. When a dollar is not always a dollar, when the 100-cent dollar becomes the 65-cent dollar, and then the 50-cent dollar, and then the 47-cent dollar, as the good old American gold and silver dollars did, what is the use of yelling about ‘cheap money,’ ‘depreciated money’? A dollar that stays 100 cents is as necessary as a pound that stays 16 ounces and a yard that stays 36 inches.”

Henry Ford, My Life and Work, 1922

Photo Credit: Mises.org

More Money For Everybody!

A Cambridge man, one for whom Mr. Keynes might otherwise admire once wrote:

“Although the price of provisions is at present very high, they cannot with propriety be said to be dear. Nothing is properly dear, except some commodity, which either from real or fictitious scarcity bears a higher price than other things in the same country, at the same time. In the reign of Henry II the value of money was about fifteen times greater than in the present age: a fowl then was sold for a penny, which cannot now be bought under fifteen pence; but fowls are not for that reason dearer now, than they were at that time; because one penny was then earned with as much labour, and when earned would fetch as much of everything at market, as fifteen will in these days.”

Soame Jenyns, Thoughts on the Causes and Consequences of the Recent High Price of Provisions, 1767

Mortgage Rates Continue To Decline

Do Exchange Rates Really Matter?

There are several schools of thought with regard to the significance of exchange rates and its effect on MNCs. According to Madura (2008), “Some have argued that exchange rate risk is irrelevant” (p. 280). Proponents of this theory subscribe to one of a number of ideas that assert that either purchasing power parity exists, that risk can be hedged, and/or attest to diversification arguments. In theory, or rather in a perfect world, prices would be offset, perfect knowledge of markets would exist, and MNCs would be equally exposed in all currency markets. However in the real world, these arguments largely do not hold. Organizations must remain aware of their potential exposure in order to remain successful.

There are three major forms wherein exchange rate exposure surfaces: transaction, economic, and translation exposure. Transaction exposure is essentially the net cash flow position at any given time taken as a whole of the organization in each currency. In certain cases, a negative cash flow in one currency might be off-set by an equal and positive cash flow by a different division within the same organization. This event would fit the idealized scenario of those who subscribe to the currency diversification argument. Unfortunately, the probability of this perfect storm occurring is gaunt.

According to Madura (2008), “The sensitivity of the firm’s cash flows to exchange rate movements is referred to as economic exposure” (p. 289-290). Economic exposure is the result of internal conditions of the host country as they relate to the ability of countries to find less costly equivalent products elsewhere. Translation exposure results from the need to exchange currency (on paper) to create financial statements in the host country of the MNC. Some may argue that this will not affect the bottom line of the organization. However, the reduction of earnings on the balance sheet will ultimately reduce the valuation of the organization, thereby reducing the optimal capitalization. Exposure to exchange markets can have a significant effect on the organization. Organizations must carefully monitor their potential to be influenced by these markets.

References

Madura, J. (2008). International Financial Management (9th ed.). Ohio: Cengage Learning
Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment