Wednesday, September 14, 2022

Innovation and the F/X cycle


WSJ:  Why is the US Dollar so Strong?  Innovation.
...the U.S.’s leading position in academic research, and the close links of universities and business, gave the country a head start in computerization in the 1970s and early 1980s, in the internet in the 1990s and in newer internet applications and artificial intelligence more recently.  
Each innovation sparked a wave of investment to take advantage of it. This improved profitability and attracted foreign capital—pushing up the dollar. <Note, USD is the price of a dollar measured in foreign currencies>


Inventions don’t stay in one country for long. But in each case America’s head start gave it a few years’ lead before investments elsewhere looked as profitable. 

Which lead to capital outflows and more consumption (imports), pushing down the USD, causing the cycle.  

WARNING:  This kind of after-the-fact theorizing is good for developing theories, but is not a substitute for testing them, i.e., correlation does not imply causality. 

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