My letter to the Wall Street Journal re: What determines currency exchange rates

Dear Sirs:
The main determinant of currency exchange rates is purchasing power parity.  In a currency market without government interventions a currency will be bid up or down so that the cost of export goods is equalized net of shipping, insurance, and other costs of moving goods internationally.  In a currency market that is manipulated by governments, currencies will have an additional cost or benefit associated with the public’s expectation that a currency will or will not suffer debasement in the future, thus losing purchasing power.  For example, in the past year holders of euros, fearful that their currency would be debased, exchanged their euros for Swiss francs, but received fewer and fewer francs for their euros over time.  The Swiss export industries lobbied their government to debase the franc in an attempt to prevent the franc from trading higher against the euro, causing them to lose sales.  This process is being repeated all over the world, as central banks print more and more of their currency in order to placate export industries.  The tragedy is that any export sales from currency debasement are paid entirely by that country’s citizens in the form of higher prices, what the popular press calls “inflation”.  The exporters get the newly printed money before prices go up, but the rest of society gets the new money (if it gets it at all) only after prices have risen.  Eventually the newly printed money finds its way throughout the economy, causing higher prices for resource replacement and removing any advantage to the exporter.  At that point the exporter demands a new shot of monetary expansion.  And round and round we go, until a general collapse in all currencies.  Patrick Barron
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