Recently ServiceNow’s Bill McDermott lamented what he deems a rising U.S. dollar, only for the technology CEO to claim that “No one’s going to outrun the currency right now.” If the assertion reads as peculiar, that’s because it is.
It’s the equivalent of Tom Brady claiming he can’t outrun the second, and that he’ll become slower unless it's elongated. A longer second would shrink Brady's 40-yard time. Yes, in a sense.
No doubt the length of a second could be doubled on the way to Brady becoming very fast in seconds, but his actual running ability wouldn’t change one iota. The second is but a measure. Changing its length won’t shorten or elongate anything.
What applies to measures of time (second), weight (pound), and temperature (degree) also applies to money. Money is just a measure of value. Nothing more. No doubt money’s value can shrink or rise if the currency in question lacks a fixed definition, but changing the value doesn’t alter reality.
McDermott’s hysteria seems to imply that a rising dollar would render U.S. technology producers less competitive globally. That’s like Brady saying a shorter second would make him slower. No, nothing would change.
Indeed, imagine if the dollar was in decline right now. Presumably McDermott would cheer such a scenario, which is the equivalent of a 5’3” basketball player cheering a shorter inch so that he could be 6’5”….Actually, there’s a little more to it with money.
Assuming a falling dollar versus other currencies, logic dictates that the dollar cost of production for U.S. companies would increase. That the latter requires stating is kind of sad, but nonetheless true. If the dollar’s value is in decline, would McDermott really expect those who participate in the globalized production of goods (most everything designed in the U.S. is produced by myriad hands around the world) to sit back and watch shrink their compensation for global production? Better yet, would McDermott accept the same amount of dollars for services his company provides if the dollar’s value is halved?
The above questions answer themselves. No doubt prices can be sticky in the near-term, no doubt contracts entered into by corporations make prices somewhat sticky, but no individual and no company earns dollars as much as they earn what dollars can be exchanged for. If the USD’s exchangeable value is in decline, logic dictates that those who accept it as a medium will demand more of them.
This also applies to investors. When investors put wealth to work, they’re doing so with designs on earning greater future returns in dollars. Ok, but why put wealth to work if a falling currency shrinks future returns? This is of particular importance to technology companies ever reliant on investment. A weak dollar would be disastrous for them given the simple truth that it would act as an investment deterrent.
All this throat-clearing is useful ahead of a discussion of the euro’s present “parity” with the dollar. It’s been a major headline of late. On its face, such a news item is of no consequence. Again, money is just a measure. Altering the measure doesn’t on its own alter reality.
As he often does, the Wall Street Journal's Joseph Sternberg stated the obvious about the above, only for what he imagines to be obvious to not be. Sternberg wrote that "The primary reason for the euro’s rapid loss of value in recent months is that interest rates are diverging between the U.S. and Europe. The Federal Reserve is acting more aggressively than the European Central Bank to combat inflation." Apparently currency traders have never agreed. Figure that Japan has had lower rates versus the U.S. across the yield curve for decades, but during much of that time the yen has risen against the dollar. Devaluation is a policy choice, of governments, not central banks within governments. But I digress.
Where parity becomes a little more consequential is in terms of how things have changed since the euro’s initial launch in 1999. In the early years it fell to roughly 4/5ths of a dollar. About its decline, some said it was inflation. Not really.
Left out of such an assertion was that the dollar was “rising” in the late 1990s and 2000-2001. Was the dollar’s rise a good thing? No, but not for the reasons that McDermott imagines. The dollar’s movement was a bad thing for the same reason that a change in the length of a second, the weight in a pound, or the heat in a degree of heat would be a bad thing. Any measure that floats is less reliable as a measure. Measures work best when there’s constancy to them. No doubt a chef’s kitchen could still operate if the amount of heat in a degree were a moving target, but the kitchen’s operation would be slower, with constant stoppages to recalculate what a “degree” is.
Money is no different. That we have trillions worth of currency trading every day is just the market’s way of saying that money’s lack of constancy as a measure requires endless hedging to mitigate the lack of constancy. Looked at through the prism of the euro’s fall versus the dollar 20+ years ago, the euro wasn’t in decline as much as the dollar was rising.
All this changed with the election of George W. Bush. Convinced like McDermott that a weak dollar was good of the U.S. economy, a falling greenback became policy under Bush. The euro subsequently “crushed” the dollar, which is as lamebrained a truth as the kilo “crushing” the pound. Measures can’t, or at least shouldn’t, crush one another. They should just measure.
Looked at in the present, is the dollar strong? More realistically, the euro is weak; even weaker than the dollar.
What matters about it is that we’re talking about currencies at all. We’re not supposed to. Currencies just are; like the second, pound, and degree are. Measures are reflective of other things, or at least they’re supposed to be. That the euro is in the news is the surest sign that money’s purpose has been perverted over time. Sadly, what matters about money is not being reported.
