Water finds it way and so do the currency

Wednesday, May 1, 2013

It’s a known fact, that water finds it way when there is a gradient difference between two points.
One can still store the water in dam, but for any productive work like generation of electricity or towards use in agriculture or even for industrial development one needs to release water from dam.

In a globalized economy, the currency is like water and particularly when there is a marked exchange rate difference between currencies. Almost all the developed economies have very strong currencies and these currencies had become very strong in last 2 or 3 decades. Hence, like water, strong currencies are finding its way into weaker currency country for productive work, particularly when the weaker currency country has a reasonable political stability and infrastructure. The weaker currency countries, termed as developing country naturally has a higher GDP compared to developed country.

The only difference is that water cannot be manufactured, while currency can always be printed legally by Government or a government debt ceiling increased towards retaining strong currency. Though there can be short term correction to foster economic development of developed country, in long run, the strong currency would act like water in a globalized economy.

Like water flooding low lying areas, when it finds the way. The global currency, once it find its way into weaker currency country can flood it, which lead to higher rate of inflation in the weaker or developing country.

On a lighter side, none is stronger than nature.

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