Gambling is a daily activity in which we all partake but are likely unaware. Without going to Vegas, America makes long-term bets with our money. U.S. greenbacks in our pockets or banks regularly rise and fall in global value. Lately, it has been a good bet.
Recent international developments have created extremely favorable conditions for the U.S. dollar’s value while many other countries face challenging economic conditions. Multiple factors have a direct effect on the fluctuating value of global currencies, including things like wars, bank crises, political instability, deficits, unemployment, civil unrest and natural disasters.
It is a complex system, but it has simple effects: Americans will find that the dollar’s increased value means a Rome vacation is cheaper, flat screen TVs made in Asia will drop in price, and gas at the pump … well, an oil supply glut and a higher valued dollar could soon lead to a two-buck gallon of gas.
In the international currency game, recent losers bet on a stable Euro or Russian ruble and against the U.S. dollar. Bad luck: Putin’s Ukraine actions and the world’s collective reaction helped tank the ruble’s value by 50 percent.
Strong countries and strong economies inevitably have strong currencies. The equation is pretty straightforward. A sizeable and resilient country like the United States that can develop, organize and access the power of its people, industry and natural resources is powerful and provides underlying value for its currency.
While the dollar is regarded as the world’s reserve currency in good times and bad, when times get really tough globally, capital always flocks to stable currencies, safe havens and secure countries – even if these countries are tiny.
Switzerland, for example, is a small landlocked country. But it makes up for its size, heft and geography by offering something uniquely valuable: banking secrecy. The country is essentially a big bank with borders. Last week, the Swiss franc momentarily spiked in value by 41 percent against the Euro because the Swiss central bank actively bet against the Europeans. This action invited capital flight to the franc from legitimate investors seeking security as well as “crooks, tax dodgers and dictators,” as The Economist magazine once summarized a notable class of Swiss clients. The value of bank secrecy? Priceless.
Swiss are practical people, too, and their bet against their neighbor’s currency had to do with calculated perceived threats to European stability. Putin’s Russia continues its adventurism. In Greece, a potential victory in today’s election for the Radical Left and its untested leader, Alexis Tsipras, is roiling markets with fears that Athens will exit the Euro. The rest of the European continent remains on edge following recent terror attacks in France. And a new, long anticipated, but late-to-the-game European economic stimulus plan is set to print and spend a trillion dollars to dilute the Euro even further. “My dream is parity,” said Italian Prime Minister Matteo Renzi – one dollar could soon be worth one Euro. Last summer, a Euro cost Americans $1.36.
In this new rich dollar environment, naturally, there is a downside: U.S. exports will be more expensive and harder to sell abroad.
Regardless, America is now in the catbird’s seat.
That does not make life easier for every American or business, but when looking at the rest of the world, the best way to judge a country’s success is by its relative power, the stability of its society and system, and the external strategic threats it faces.
On all counts, the U.S. is exactly where every other country wants to be. As President Barack Obama said in his speech before Congress, “The shadow of crisis has passed, and the State of the Union is strong.” The dollar, too.
Countries that do well offer citizens security, individual liberty, property rights, equal legal protections, sound fiscal and monetary policies, intellectual freedom, growth and hope. A little healthy Super Bowl diversion now and again doesn’t hurt either.
If America actively supports equality of opportunity, keeps strategic competitors at bay and continues to practice innovation, investment and international caution, then the U.S. and the dollar can stay in its supreme position globally – even when the size of China’s economy soon surpasses America’s. The odds will remain in our favor. Bet on it.
Markos Kounalakis is a research fellow at Central European University and a visiting fellow at the Hoover Institution. Contact him at email@example.com and follow him on Twitter @KounalakisM.