Exchange Rates Impact small business

by Peter Anderson
BrokeSucks.com Editor

Currency values are an issue that are relatively invisible to employed working persons. When the issues do start manifesting themselves in rising prices, business greed is blamed.

To those who receive checks in a foreign currency the issue is plain as day. Seeing incomes slashed by 5, 10, 30% or more is reality. In this globalized environment your income can be boosted, or cut, in double digit percentage points.

In recent years the US dollar has come under pressure. For those that are paid in US dollars but live in foreign countries this has been a very bad thing.

Once seemingly only a concern for currency speculators like George Soros, politicians, and central banking members, currency fluctuations are now impacting businesses in every single country around the globe.

 

What makes currencies gain and lose value?

Today our world is encircled in print money schemes. Any country can, at will, increase or decrease the amount of money they have in circulation. Money is not a fixed or limited resource. Its production potential is almost unlimited.

A government does not actually have to print money to create it. In the United States there are roughly $900 billion in print currency circulating the system -- we call it cash. All together, the supply of funds, largely in the form of electronic numbers at banks, is around $10 trillion.

If someone had the ability to create cars on demand for minimal extra cost, the prices of used and new cars would collapse immediately.

Why then does the ability of money to be printed on demand not result in its immediate devaluation?

This is a question none of us can answer with absolute certainty. Much of this answer does lie in a countries stability and the perceptions by its currency holders of a long and prosperous future.

Through out history many countries have become victims of serious monetary problems from hyperinflation to currency devaluation. In recent years Mexico, Malaysia, and Argentina have all experienced terrible currency crises due to mismanagement. Argentina's collapse turned much of the middle class. To this day Buenos Aires remains a real estate bargain destination.

Hyperinflation is another terrible disaster that occurs when a government prints too much money. The most infamous case is Germany in the 1920s. One story goes that a waiter was tipped with a US dollar upon which he promptly assembled his family and lawyer to set up a trust fund. Sadly Germany's event laid the ground work for Hitler's rise to power and the mass extermination of Jews.

Hyperinflation is hardly a ghost of the past. As I write this article Zimbabwe is experiencing hyperinflation.

 

How to protect yourself from falling currency values

Unfortunately you do not have too many choices. There are however, a few steps that you can take.

First see if you can be paid in a stable or appreciated currency if your payments will be in the future. A example would be royalty payments. Unfortunately you may have little leverage in this situation to make things go your way.

The second thing you can do, if you have lots of cash on hand, is put your savings in an overseas bank acount in another currency.

The third thing, which I can not recommend right now, is to invest in foreign securities. The slide of the US dollar in part prompted a large investment in emerging markets recently. However rising interest rates and the possibility of an appreciating dollar signaled a hasty exit and correction to those who remained.

What currencies are stable? This is hard to say. Most countries have ideal spots they wish to be at in comparison with other countries. China is a prime example of this with their fixed exchange rates.

If a countries' currency goes up it gives them more buying power. It also means that suddenly their exports are not nearly so attractive. That means unemployment and for developing countries political unrest. To stay competative countries' drive down their currency's value. Politicians ride the waves of popularity as their lower class prospers, at least temporarily. This strategy can backfire in an ugly currency devaluation.

I have one solution to this problem: earn more money.

 

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