Relative Strength vs Actual Strength

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We tend to talk about the strength of currencies against other ones. “Weakening against the US Dollar” or “Because the US Dollar is gaining strength” or “USD is at a 20-year high”. Statements like this are certainly true, and may indeed have relevance to some economists.

But truly, nobody else cares. It doesn’t actually matter to our daily lives until the very moment we trade some of those dollars for other things.

After all, what matters in our financial lives isn’t how much money we have, it’s what we can exchange that money for when we chose to do so. Real things, as in goods and services. There is a psychological value in security, sure. But it isn’t truly real, security is a belief about the future, a projection. No one knows what’s going to happen in the time that isn’t here yet, and anyone who tells you different is just wrong. We can guess about it, and we can bond others to promises they’ve made about it, but no one can know the future with certainty.

It’s good to remember that words like trades and securities and bonds and futures and currencies and exchanges all have their linguistic roots in real things that we each can easily understand and relate to. The more derivations each financial instrument makes from that original meaning, the more deviations the wealth itself makes. The more middlemen in the process, the more people need to be paid off before we can claim what remains, and the less of that wealth there is for us to ultimately trade for the stuff and experiences we can use. In this light, simplicity often equals savings.

I heard someone use this simple analogy recently to describe relative strength of a currency. A bunch of skydivers holding different currencies jump out of a plane with different kinds of parachutes. They can all open their chutes at different times and each will slow their decent at different speeds, but they are all undeniably falling in the same direction. From the perspective of the faster-falling Peso skydiver, the slower-falling Dollar skydiver is moving up. The Dollar looks strong, and it is by comparison.

But let’s not confuse this with actual strength, or intrinsic value. The direction of travel is indisputably the same for all the skydivers: down! Our US Dollar has lost over 95% of it’s value in the last 100 years — and we just made more of those dollars in the last 2 years than in the nearly 240 year history of our Dollar before that. Down is the direction of travel, and it’s getting faster not slower, even as it appears to slow and reverse direction from the perspective of other currencies.

It’s a useful mental image as all the fiat currencies in the world are falling, and some are falling faster than others. There’s a big difference between currency and money, and one way to see it is the difference between relative strength vs. actual strength. No amount of relative strength can make us strong, just as tethering ourselves to the slowest moving falling object will not prevent us from hitting the ground.

Which kind of strength are you seeking? Now’s a great time to align your financial strategy with what you really value.

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