The foot, second, and tablespoon can’t alter reality as much as they reflect it as constant measures of length, time and weight. Hopefully what’s been written so far is a statement of the obvious.
If not, imagine what would happen if the length of a foot were suddenly shrunk to six inches. We would all stand over ten feet tall! Except that we wouldn’t be any taller. Measures like the foot, second, and tablespoon are a veil. Changes in their definition can in no way alter actual length, time and weight.
Which brings us to a recent column by the Washington Post’s Megan McArdle. She wrote that upon moving to London in 2005 to start a new job at The Economist, she “was still paid in dollars. And because it took nearly two dollars buy one pound, I was still broke.” There's another way of looking at this than McArdle does.
More realistically, McArdle was broke because she wasn’t paid very well. Journalism generally doesn’t, particularly for those new to it. Yet she blames her Dickensian living situation in ’05 on the dollar’s value vis-à-vis the pound. This included lining her worn out shoes with newspaper.
It all sounds so awful, and no doubt it was. But for McArdle to blame the dollar’s exchange rate on her relative poverty in London would be the equivalent of me claiming I’m not in the NFL because the second is too fast, thus rendering my 40-yard dash time too lengthy. Except that speed is speed, as are dollars just dollars.
Seemingly left out by McArdle is that nominal pay in pounds is likely reflected in the exchange rate. Put in a more extreme sense, it takes 140 Japanese yen to buy one dollar. Does anyone think that U.S. based Japanese employees of Honda, Panasonic and Sony are staggeringly broke for the same reason McArdle claims she once was?
Speaking of Japan, McArdle writes that “Higher interest rates" presently make the U.S. "more attractive to global capital,” which is supposedly the source of the dollar’s ascent. Dollar/yen history questions this supposition. Indeed, interest rates in Japan have been lower across the yield curve relative to the U.S. for decades, but the yen has largely risen against the dollar for much of the that time.
More broadly, the highest interest rates in the world can logically be found in some of its poorest countries. And for obvious reasons. They’re risky. Fear not if you’re worried their currencies represent a threat to the dollar.
In truth, a focus on interest rates as a way of allegedly divining the direction of currencies really isn't very illuminating. Rates were skyrocketing stateside in the 1970s, but the dollar was in freefall against the deutscehmark, Swiss franc, and yes, the yen. In the 1980s rates were falling rapidly amid a rising dollar against most foreign currencies. McArdle herself alludes to the 1985 Plaza Accord, which was a gathering of monetary heads from major countries focused on arresting the dollar’s ascent amid falling rates. Currency direction is a policy choice that doesn’t much relate to rates of interest. But that’s a digression.
McArdle’s column referenced a recent return to London during which her dollars allegedly exchanged for more in the way of British plenty thanks to the pound’s fall. No, money is a veil. It’s a measure. An alteration of the measure doesn’t alter reality. More than anything, McArdle’s ability to eat and shop well seventeen years after her early career poverty speaks to her ascent as an economics writer. For that she should be thrilled. Success is real, and thankfully it can’t be faked by the mere movement of exchange rates. Reality always intrudes, including when currencies are unstable.
