Currency Wars

In election season candidates make a lot of promises(duh). With China's economic rise it has become popular to outline a plan to compete. These plans usually involve "bringing back American manufacturing" as the path to prosperity. This sounds really good to blue collar workers, many of which face a bad job market. Another popular promise is to maintain a strong dollar. This is popular with the middle class who want to have purchasing power. The fact is however, that these goals are opposed to each other.

Purchasing power refers to the value of a currency relative to another. This can best be seen through exchange rates. When a country with a low exchange rate exports a product to a country with a higher one then the product is cheaper for the importer because it cost less to make. This is why countries with strong currencies (i.e. US, UK and Eurozone nations) import so much.

An example with numbers helps to make this clearer.
Imagine a world with two countries Skyrim and Hyrule (to use a nerdy example) with currencies septims and Rupees respectively. Lets give them an exchange rate of 3 rupee to 1 septim. Hyrule's main export is milk and they pay their farm workers an average wage of 10 rupees a day. One can make ten bottles of milk a day. Because of the prosperity in Skyrim they are willing to pay 1 septim for a bottle of milk(a better price than they would get from local farmers). When the money gets back to Hyrule the product of one workers day is worth 30 rupees. The surplus of this can be used to pay management, increase wages or be reinvested by owners. This should serve to illustrate why it a weak currency favors exporting.

China has gone to great lengths to keep their currency weak(this is often branded as "currency manipulation" by politicians) in order to have strong manufacturing.. America tries to keep its currency strong to allow for us to import. This symbiotic relationship is often called Chimerica. This relationship has benefited both nations but it has benefited China more. The question is how long this can last. With a growing middle class China may face pressure to strengthen their currency.

The claims by the republican candidates as well as Obama that they will restore American manufacturing while still giving the middle class the good exchange rate they want is pure pandering. Without a weak currency the US would have to increase manufacturing productivity enough to compensate(an unlikely prospect)