Apparently a number of Asian countries are racing to devalue their currencies in an effort to boost exports.
While a weaker currency can help boost sales it can only do so for a temporary period of time, if at all.
Take for instance South Korea, which has experienced a large drop in the past 2 months alone — a depreciation of nearly 20%.
A number of pundits have suggested this will help spur exports but the problem is that everyone they are exporting to is broke. In addition, because the country is very small (the size of Indiana) it is must import large amounts of resources for internal consumption. Thus a weak currency really hurts the importation side of the equation.
A quick illustration
Let’s go back a year, when there was a “stable” exchange rate for the Korean Won to the USD: 1000 to 1. Assuming that the US, one of Korea’s largest trading partners, was not undergoing a contraction, a weaker won would allow Korean manufactures like LG or Samsung to export products at relatively lower prices. It can still do so, but no one is buying their products, even at a lower price.
The exchange rate has been at least 1200 to 1 for the past 6 months and for a large portion of the time 1400. Worse yet, for the past two weeks the exchange rate has been more than 1500 to 1.
Yet even at half price, the Korean manufacturing firms are still posting terrible earnings.
Simultaneously Korean consumers are not getting the benefit of deflating commodity prices like oil.
So while oil has dropped from a high of $147 last July to around $45 over the past couple of months, a weak Korean Won has not been bueno for the Lee’s and Kim’s because their purchasing power has declined… meaning it currently costs them 50% more to buy the same amount of oil. Thus the average family and business is earning less and paying more. A crappy situation.
A recent Bloomberg piece covers this at length and notes that other countries are also adopting weak currency positions which is so incredibly inane considering there is no export market right now.
See also: So that’s why they are screwed?